Midterm elections spur uncertainty in markets

Voters line the aisle as early voting for the midterm elections begins at the Citizen Service Center in Columbus, Georgia, on October 17, 2022.

Cheney Orr | Reuters

Investment advisors say it’s not wise to try to time the market, but it does make sense to adjust your portfolio periodically. So with the midterm elections now a week away, but the outcome still not in focus, does it make sense to make those adjustments now?

Probably not, say most financial advisors.

“Investing based on political beliefs or what you think might happen politically is an emotional decision, and emotional decisions regarding investments tend not to work very well,” says certified financial planner Shaun Melby, founder of Nashville. Tennessee-based Melby Wealth Management.

He points to the Point Bridge America First ETF fund, which trades under the symbol MAGA and is marketed as a way to invest in companies that align with Republican beliefs. From its inception on September 7, 2017 through election night on November 3, 2020, MAGA returned 6.85%, while the S&P 500 ETF SPY returned 36.10% over the same time, according to Tradeweb.

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Electoral impact, policy outcomes are moving targets

There is also uncertainty about the outcome. While the poll suggests Democrats may be losing control of Congress, polls are not elections. And even if you predicted the outcome of the vote, you could still be wrong about its impact.

“Like many market events, you can be 100% correct about the timing or outcome, but wrong about how it affects the stock market,” says Kevin J. Brady, a CFP and a New York-based vice president at Wealthspire Advisors. “It’s not really that important which political party is in power, so much so that there are more predictable outcomes.”

Policy outcomes are also a moving target, making it challenging to invest based on what you think might happen.

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“Policies are pretty hard to get in place, so you generally have a pretty good time dealing with whatever that policy might be,” says Taylor Sutherland, senior wealth advisor at Halbert Hargrove, number 8 on CNBC’s 2022 FA 100 list.

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“Policy often changes until it’s done,” he added, pointing to President Joe Biden’s infrastructure bill, which began as a $3 trillion proposal but ended up at $1 trillion, with many changes in the details.

Financial advisors say it’s best to adjust your portfolio based on your financial goals and not on the outcome of any event. And it is best to consider the overall economic outlook.

Sutherland says his firm adjusted portfolios in late 2021 to early 2022 as economic signals changed and inflation began to pick up. “Those signals indicated to us that it was time to get defensive,” he said. “So we traded out of stocks and into cash for a portion of our client’s portfolio, and we’ve maintained that position all year.”

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The market has a ‘very clear’ medium-term pattern

Historically, stocks tend to do better after midterm elections. In 17 of the 19 midterm elections held since 1946, stocks outperformed in the six months after the election than in the six months before the election.

“If you look at the history of this, the market has a very distinct trading pattern in midterm election years, where the first six to nine months tend to be very rocky,” said Philip Orlando, senior vice president and chief equity market strategist. at Pittsburgh-based Federated Hermes.

The party that controls the White House usually loses seats. If we have a similar result this year and there is a divided government, Orlando says the stock market could achieve a 15% to 20% rise in the spring. But there will be time to adjust after November 8 and the outcome and economic outlook are clearer.

“This could be an interesting time to start picking up some high-quality oversold growth stocks,” Orlando said.

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