Summary of Key Points
As the mid-term elections in the United States approach in November, investors are assessing their potential impact on the market and the economy. Historically, U.S. stocks tend to decline between May and October in years with mid-term elections, but so far this year, the S&P 500 has risen by 2.46% since May. There is a divergence of views among institutions regarding the risks: some believe the market is "self-satisfied" and may experience another downturn between August and October; others see the elections as a "normal risk," with core policies still being determined by the executive branch. July and August are critical periods for the elections, as voters' preferences largely solidify. Voters are most concerned about the economy, but neither party has a clear advantage in this regard. Regardless of the outcome, key policies such as tariffs and geopolitics are likely to continue, and U.S. stocks are expected to rise in the year following the elections (with an average historical return of 15%).
1. Historical Patterns: U.S. Stocks Tend to Decline in Summer and Autumn of Mid-Term Election Years
From 1960 to the present, the S&P 500 has averaged a decline of 2.6% between May and October in years with mid-term elections, compared to a gain of 3.1% in other years. This is due to the high uncertainty surrounding policies before the elections, which makes investors more cautious. However, so far this year, the S&P has actually risen by 2.46%.
Investment firm NDR warns that this does not mean the risks have disappeared; rather, they suggest the market may be "too optimistic." They note that current sentiment indicators are consistent with historical patterns of a pullback in the third quarter of the president's second year in office, although the market has not yet prepared for another decline between August and October. For example, sentiment indicators indicating excessive optimism have persisted, while policy factors (such as monetary and fiscal policies) have begun to tighten (with slower growth in federal spending), and the impact of tax refunds on consumption diminishing, along with the possibility of interest rate hikes by the Federal Reserve, could all create moderate pressure before the elections.
2. Divergence of Views Among Institutions: Are Elections a "Risk of Self-Satisfaction" or "Normal Fluctuations?"
- Cautionary View (e.g., NDR): Some institutions believe that the market is paying too little attention to the elections. There are two main reasons for this: first, many assume the outcome is already determined (the ruling party usually loses seats in mid-term elections, and Trump's poll numbers are not good); second, events such as the Middle East situation, spending patterns of tech companies, and the selection of the Federal Reserve chairman have distracted attention. However, NDR emphasizes that this does not mean the elections will not affect the market, and there may still be adjustments between August and October.
- Optimistic View (e.g., Morgan Stanley, BCA): Other institutions see the elections as a "normalized risk" rather than a sudden shock event (like the situation in the Strait of Hormuz). The core argument is that key policies such as tariffs, diplomacy, and deregulation are ultimately decided by the executive branch, and changes in congressional composition have limited impact. For example, BCA strategists argue that even if there are concerns about Democrats potentially raising taxes, which could lead to short-term adjustments, the market will primarily focus on supply-side factors (such as production and supply chains), with the elections being a minor distraction.
3. July and August as a Critical Period for the Elections: Voters' Preferences Solidify
BCA strategist Ma Yushu points out that July and August are crucial, as by the end of summer, the majority of voters have made up their minds. Subsequent campaigning is aimed at persuading existing supporters rather than attracting new voters. Polls by Pew Research show that voters are most concerned about the economy (especially prices and living costs), but neither party has a clear advantage on this issue, with 37% preferring Democrats and 36% preferring Republicans.
4. Impact of Election Results on Policies: Core Policies Are Likely to Continue
Morgan Stanley believes that regardless of the election outcome, the core policies driving the market (tariffs, geopolitics, deregulation) will likely continue. Specifically:
- If the Democrats gain control of both the Senate and the House, the White House may face difficulties in passing new legislation, while Trump is expected to rely more on executive actions (such as raising tariffs and promoting tech security).
- If the Republicans retain control of the Senate, there may be increased internal strife between the parties on domestic policies, but key foreign policies (such as tariffs) will still be determined by the president. In short, the elections are unlikely to cause a dramatic shift in policy direction, so investors do not need to worry about "substantial changes."
5. Market Outlook: Volatility Before the Elections, Likely Growth After
Historical data shows a pattern of market activity around mid-term elections:
- Before the elections: Markets typically hit bottom around October (e.g., NDR predicts adjustments between August and October).
- After the elections: Markets perform well. According to capital groups, the S&P 500 has averaged a gain of 15% in the year following mid-term elections since 1950; Fidelity even reports that 95% of years have seen market gains in the year after such events.
In summary, while mid-term elections may cause short-term volatility, they are likely to lead to long-term improvement for the market. Investors should not panic too much, but they should also not be complacent—there may be minor adjustments between August and October. However, the market outlook after the elections is promising. The key focus should be on the continuity of policies, rather than the noise surrounding the elections themselves.