History suggests you should be skeptical of any sentence that begins “history suggests.”
For example, you may ask your history-loving friends, what does the textbook say happens in the markets after the Federal Reserve ends a bond-buying program that swelled its balance sheet to $4.5 trillion? The answer, of course, is what is known on the Web as a 404 error code: “File not found.”
Yet this is the big question looming above all of the perfectly reasonable suggestions that history is currently making, whether it regards variables that could affect the market such as the makeup of Congress or variables studied just for fun, like what happens to stocks after the Eagles start off 6-2 and need to switch quarterbacks halfway through the season.
That said, whenever history suggests anything, it’s hard to ignore. Sort of like when your spouse “suggests” you get your lazy, worthless bones off the couch and do some housework. Since no one’s crunched the numbers on the Eagles situation yet, here’s what history suggests about midterm elections: they’re generally followed by better-than-average gains in stocks.
Fourth quarters of midterm years have produced an average gain of 8 percent in the past 65 years, according to the Stock Trader’s Almanac. They’ve been followed by rallies of almost that much in the next three months, making the average 16 percent two-quarter rally the best combination of the election cycles.
To break it down further, history is suggesting that the best thing for the stock market would be for Republicans to gain control of both houses of Congress in today’s elections.
The S&P 500 has risen an average 15.1 percent in calendar years when a Democratic president has been opposed by a Republican-controlled Congress since 1945, according to S&P Capital IQ equity strategist Sam Stovall. To be fair, the returns are nearly identical -- 15.07 percent -- when Republicans control both the White House and Congress, but this time around that scenario is impossible unless you can find a way to invest in Ann Coulter’s daydreams.
At first blush, that sounds like an impressive track record. Since 1945! That’s like, a couple hundred years or whatever. Yet as Stovall points out in his report, the Democratic president/Republican Congress scenario has only occurred in eight years since 1945, so there’s not a ton of data to work with.
The returns for a split Congress with a Democratic president, which only happened in four years since 1945, have averaged 13 percent. And the S&P 500 has gained 9.8 percent on average in the 22 years when a Democrat controled the White Houses and both chambers of Congress, according to Stovall’s report.
“Midterm election years can be broken down and sliced into so many ways, it becomes hard to make any reasonable inference,” BTIG LLC chief strategist Dan Greenhaus wrote in a note to clients. “We would hardly classify anyone’s data set as statistically significant.”
In other words, history suggests that some historical data points are worth more than others.