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4 Things Investors Should Consider During the 2022 Midterm Elections

There will always be a lot to consider during any election period. However, given the last couple of years, it is understandable to be concerned about what your vote may mean for you.

Midterm elections will take place on Tuesday, Nov. 8. It's common to have questions at this point before preparing your ballot. The midterm elections occur halfway through a president's four-year term. During these elections, all 435 seats in the U.S. House are up for election and 35 seats in the Senate. Additionally, 36 states and three territories are holding elections for their governor.

Equities typically perform well-following midterm elections as political uncertainty declines. The markets prefer certainty to uncertainty. During the last 90 years, the Standard & Poor's 500 index produced a median return of 3% through year-end and 17% during the 12 months following midterm elections.

Historically, equity market returns have usually been slightly more substantial under a divided government versus periods when one party has unified political control. However, it's essential to consider other risks facing the U.S. and global economies, such as high inflation, generally rising interest rates, lingering supply chain issues, and other possible unforeseen risks.

The Equity Market Has Been Positive the Year After Midterms

Notably, over the past six decades, the president's political party has lost, on average, 23 seats in the U.S. House. The only presidents who led their party to gain seats in the House were Bill Clinton in 1998 and George W. Bush in 2002. However, the stock market has posted positive returns in the calendar year following midterms for more than six decades, regardless of the election outcome.

Markets Are Often Volatile in Year Two of a Presidential Cycle and Perform Strongest In Year Three

Markets historically tended to perform the worst in the year ahead of midterms, and 2022 appears to be continuing that pattern. However, year three of the presidential cycle has historically posted strong average returns. Market results in the year after midterms have tended to be strong regardless of the outcome, despite talk of markets preferring divided government.

Politicians Don't Radically Re-Engineer the Economy or Dramatically Alter Economic Growth

Many investors fear that a political party might radically re-engineer the economy. But consumption, business investment, and government spending have been remarkably consistent as a gross domestic product (GDP) percentage across multiple iterations of government control. Moreover, economic activity, represented by the median annualized quarterly percent change in U.S. GDP, has been remarkably similar during single-party and divided government rule.

Investors Have Been Better Off Remaining Fully Invested

Lastly, over the past 120+ years, those that would have stayed fully invested in a diversified portfolio in both Democratic and Republican administrations would have likely seen generally positive growth.

The more time investors spend participating in markets, and the less time they spend focusing on politics, the better. Ultimately, making impulsive decisions is one of the worst things you can do.

The data shows that during election periods, nothing drastically changes year-to-year, regardless of who wins. Don't let election outcomes disrupt long-term investment plans — no matter who you favor.

If you would like to learn more about how investors should handle volatile market situations, check out another recent blog, 3 Tips for Facing a Volatile Market.

Investment advice is offered through OneDigital Investment Advisors, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.

Any economic forecasts made in this commentary are merely opinion, and any referenced performance data is historical. Past performance is no guarantee of future results. All investments are subject to risk of loss, and any investment strategy may lose value.