Page 29 - DIY Investor Magazine | Issue 36

29
Dec 2022
DIY Investor Magazine ·
INVESTMENT IMPLICATIONS
Markets often experience lower returns and higher volatility during election years due to heightened uncertainty.
Yet, there are limits to what averages can tell us because financial crises, tech bubbles, pandemics, and geopolitical crises do not follow the election calendar and have disrupted markets during past presidential or midterm election years.
Some investors are eager to sit on the sidelines until election uncertainty passes, but risk missing subsequent rebounds. The two most recent presidential elections in 2016 and 2020 are prime examples of this.
In the early hours of 9 November 2016, futures plummeted as election results were coming in, but markets closed 1.1% higher after that day’s regular trading session when the results were finalised.
Markets were up 7.3% in the week of the 2020 presidential election, despite not having an official result. Although typically Q4 returns after midterms are strong, there are two notable recent exceptions: 2018 and 1994.
The Federal Reserve (Fed) was tightening monetary policy during both of those periods, but crucially, pivoted shortly thereafter. The Fed paused its rate hikes after December 2018 and cut three times in 2019, and the Fed ended its rate hiking cycle in February 1995.
Markets subsequently rebounded in both instances. Although the Fed is still some way off from a pivot or pause, we are likely closer to the end of the Fed hiking cycle than the beginning.
In short, when it comes to market drivers, the Fed is the signal, and the midterms are the noise.