Midterms and the Markets

By Don McArthur, CFA®, Senior Investment Strategist and Director of Equity Research
October 26, 2022

With so much uncertainty facing investors this year — inflation surging to the highest levels in 40 years, the ongoing and intensifying war in Ukraine, an extremely volatile bear market and evolving economic conditions — the U.S. midterm elections have almost become an afterthought. However, with Election Day 2022 just days away, Commerce Trust examines the potential impact the midterms could have on the equity market.

Midterm Elections
Midterm elections historically have served as a referendum on the political party that controls the White House, with the president’s party often losing ground in Congress. Since the end of World War II, the president’s party lost House seats in 17 out of 19 midterm elections and Senate seats in 13 out of 19, with an average loss of 27 seats in the House and four seats in the Senate.1 Based on this track record, it appears voters prefer a divided government.

What does that mean from an investor’s perspective? We looked at the historical market returns under the three likely scenarios facing the 2022 midterm elections of a sitting Democratic president combined with: 1) Democrat control of Congress, 2) Republican control of Congress, 3) split Congress. (Figure 1)
Dow Jones Average

Looking at the performance of the Dow Jones Industrial Average dating back to 1900, the strongest returns came during periods of divided government, with the scenario of a Democratic president and split Congress delivering real
annual returns of 8.0% followed by the Democratic White House and Republican Congress delivering 5.2% in real returns. In contrast, single party control where Democrats controlled both the White House and Congress produced a 2.7% real annual return. So, it appears the markets also prefer a divided government.

There’s an adage that markets don’t like uncertainty. Elections tend to bring clarity to the markets even if the result is political gridlock. Since 1950, the average one-year returns of the S&P 500 Index following a midterm election has been about 15%. (Figure 2)
Returns following midyear elections

However, we believe the current economic cycle is more impactful to the capital markets than the outcome of November’s midterm elections. History shows that patient investors who remain focused on long-term financial goals may be better positioned to withstand headwinds like political uncertainty than those who let short-term volatility dictate their investment decisions.

If you have questions about the potential impact of the midterm elections on your portfolio, contact a Commerce
Trust advisor to be sure your investments are properly aligned with your goals.

1The American Presidency Project, University of California-Santa Barbara, “The 2022 Midterm Elections: What the historical data suggest,” August 30, 2022.
The Chartered Financial Analyst® (CFA®) Charter is a designation granted by CFA Institute to individuals who have satisfied certain requirements, including completion of the CFA Program and required years of acceptable work experience. Registered marks are the property of CFA Institute.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of October 24, 2022. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust. This material is not a recommendation of any particular
security, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional.
Diversification does not guarantee a profit or protect against all risk. Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
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ABOUT THE AUTHOR

don mcarthur
Don McArthur, CFA® Senior Vice President, Senior Investment Strategist and Director of Equity Research Commerce Trust Company 
Don serves as a Senior Vice President & Director of Equity Research with Commerce Trust Company in Kansas City and manages the Fundamental S&P 500 Equity Strategy. Don joined Commerce in 2006.

Don earned his accounting degree and business administration degree with economics from the University of Kansas in 1995. He also earned his Master in Business Administration degree from the University of Missouri-Kansas City in 2000 and holds the Chartered Financial Analyst® designation.