Midterm elections, like the one we just had on November 7, tend to impact the stock market in predictable ways. Stocks tend to sell off and volatility increases before the vote, then the market typically calms down and rebounds in the months afterward and through the first half of the following year.

Has this midterm election had the expected impact? Well, yes and no. As I see it, the election has affected market performance and volatility, but to a lesser degree than usual.

Looking back at the fall, the stock market proved once again that it likes predictability and is rattled by uncertainty. About 8 weeks prior to the midterm election, the market began to anticipate a flip to a Republican majority in the House of Representatives. As investors became more confident of the election result — and two years of legislative gridlock in Washington – the market rallied, and volatility decreased. Relatively, speaking, the market’s reaction was tepid. The jolt that usually accompanies anticipation of a stalemate on Capitol Hill was tempered by concerns about the unpredictable economic and political environment. This midterm election has had less impact than usual on market dynamics because inflation, interest rates, a possible recession, and the war in Ukraine have been catalysts for uncertainty. In fact, Jerome Powell’s comments seemed to have more influence over the market than the outcome of the November vote.

Historically, the S&P 500 has averaged a 16.3% return in the 12 months after a midterm election. If we see that type of increase, we’ll be close to breaking even since the beginning of 2022. The trailing return of the S&P through November was down about 15%. Right now, I think a 16.3% return is unlikely; however, I do think the U.S. stock market is going to move higher through the end of December and into the first half of next year. There are a couple reasons for this. First, the Fed recently said it plans only a few more rate hikes, all of which may be smaller than the recent .75-point jumps. Second, a divided Congress means continued gridlock on Capitol Hill. There should be no massive changes in tax law or business regulations to interfere with the bets investors have made on companies and their growth rates.

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The general consensus among economists is that a U.S. recession is inevitable although there’s still some disagreement about its severity. Speculation about a global recession is increasing given continued geopolitical tensions, supply chain disruptions, inflation, and interest rate increases. The depth and duration of a global recession may depend largely on the course of the war in Ukraine. Whatever occurs, I think U.S .blue chip stocks will probably be the safest place for investors to have their money.

I continue to advise pre-retired and retired clients to invest in large, well established U.S. companies that have consistently paid dividends to shareholders. These companies aren’t particularly fast growers, but their relatively low market risk is particularly attractive in the current market environment. Many old-style companies in the financial, industrial, consumer packaged goods, and utility sectors have weathered the storm pretty well this year. In 2022, the blue chip averages outperformed the S&P 500 by the widest margin since 1933. While the tech companies have been crushed, they could rebound next year. Investors can make a lot of money in tech, but if you’re looking for predictability and consistency, I just don’t think it’s the place to be.

It’s unwise to let election outcomes dictate your decisions, especially if you’re investing for the long term. Elections tend to influence market movements over days and weeks, not months and years. They rarely have any impact on investment performance over the course of a lifetime.

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