Tags: Midterm Elections, Stock Market

We Want to Hear From You: What Stock Market Moves Will You Make After Midterm Elections?

By , Associate Editor, Money Morning •

Now that the hotly contested midterm elections have been decided, U.S. voters will watch to see if newly elected officials will deliver on promises to lift the nation out of its economic morass.

We Want to Hear From You: What Stock Market Moves Will You Make After Midterm Elections?

Many voters made their decisions out of frustration over current economic conditions. Government spending, ineffective stimulus measures and stubborn unemployment were the biggest issues among voters this year. And given the potential for change in U.S. economic policy, investors are eager to see what the stock-and-bond markets will do in the months to come.

Although there is unlikely to be any quick decision making in Washington, investors will hope for the status quo in at least one area - a continued market rally, which is the norm for midterm election years.

A study released Tuesday by Bespoke Investment Group examined every midterm election year since World War II. One year after Election Day, the Standard & Poor's 500 Index averaged a gain of 15.8%, with positive returns every year.

Although some think the S&P 500 has already priced in gains, markets that are headed up leading into the elections historically continue that rally after the election-day dust has settled. In years when the S&P 500 rallied more than 5% in the two months preceding the elections, there was only one period where the S&P 500 traded down more than 5% in the year following Election Day.

This year, the market has been rallying more than 5% - meaning investors could be facing a key buying opportunity ahead of yearlong-market growth. 

What do midterm elections have to do with market performance? Well, first and foremost, election results tend to eradicate the single-biggest enemy of the stock market: Uncertainty.

"Changes in congressional majority power in midterm elections appear to have little to do with causing the strong performance of equities following the election," The Leuthold Group's Eric Bjorgen told Kiplinger. "It's knowing what's going to happen, knowing how policy will be formulated. It's a clearing up of the clouds of uncertainty." 

But a power shift can also offer some clues as to what lies ahead in Washington - and provide investors with hints about where to put their money.

Wall Street has been hoping for a pro-business Republican majority, which could help boost stocks and bring the country closer to financial stability.

"Most of the people I'm dealing with are hoping Republicans get a firm grip on things, and the thinking is that that ultimately helps out the economy," Phil Streible, a senior market strategist with futures broker Lind-Waldock, told CNN. "Spending won't be as loose, budgets will be more in line and fiscal responsibility will kick in."

While some will view this historical uptrend as a "Buy" signal, others will exercise caution and preserve capital in safer investments - or in commodities or emerging-market stocks - until the economic outlook clears.

This brings us to next week's Money Morning "Question of the Week": What investment moves will you make now that midterm elections are over? Do you think there will be a market rally, as we've seen like in other election years? Are you optimistic about the direction of U.S. economic policy and stock markets, or do you have less confidence in a strengthened economic recovery than before the elections?

Send your thoughts, questions and concerns to [email protected].

[Editor's Note: Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line.

We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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