Midterm elections spur uncertainty in markets

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

Cheney Orr Reuters

Investment advisors say it’s unwise to try to time the market, but it makes sense to periodically adjust your portfolio. 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 investment decisions tend not to work very well,” said certified financial planner Shaun Melby, founder of Melby Wealth Management based in Nashville, Tennessee. .

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

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Election impact, policy outcomes are moving targets

There is also uncertainty in the outcome. While polls suggest Democrats may lose control of Congress, polls aren’t elections. And even if you predicted the outcome of the vote, you could still end up wrong about its impact.

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

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 put in place, so you generally have a pretty good lead time to deal with whatever those policies are,” said Taylor Sutherland, senior wealth advisor with Halbert Hargrove., ranked No. 8 on the CNBC 2022 FA 100 list.

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“Policies often change until they’re finished,” 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 details.

Financial advisors say that it is better to adjust your portfolio based on your financial goals and not on the outcome of any event. And it is better to consider the general economic outlook.

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

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The market has a ‘very distinct’ midterms pattern

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

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

The party that controls the White House typically loses seats. If we have a similar result this year and there is a divided government, Orlando says that the stock market can organize a rally of 15% to 20% in the spring. But there will be time to adjust after November 8 and the result and the economic prospects are clearer.

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

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