Of Mutual Interest Market Warnings Signs

FILE - This Feb. 7, 2018 file photo shows The Charging Bull sculpture by Arturo Di Modica, in New York's Financial District. Many along Wall Street expect the bull market rally that began in March 2009 to eclipse the 1990-2000 run that ended with the dot-com crash. But more voices are questioning whether the stock market’s run will make it beyond 2019 or 2020. (AP Photo/Richard Drew, File)

Depending on your political persuasion, you probably are either in victory or defeat mode following the much-hyped midterm elections. But if you’re a long-term investor (and I hope you are, because Social Security will not be your retirement salvation) you need not be perturbed. Arguably the most successful investor of all time, Warren Buffett, often says, “if you mix politics and investing you’re making a big mistake.” And history bears him out. While emotion may be the life blood of politics, it is often the death knell of investing.

The following facts have been laid out by MarketWatch, an online investment information website. Since the end of World War II, there have been 18 midterm elections. After each one, U. S. stocks were higher 12 months later. Every single one. That’s 18 for 18, no matter how the ballot turned to favor either Democrat or Republican. The same pattern followed every possible outcome combination: Republican president/ Democratic Congress; Democratic president/Republican Congress; Republican president and Congress; and Democratic president and Congress.

Since 1946, stocks have risen an average of 17 percent in the year following a midterm election. Measured from the yearly midterm lows, the results are even better. From their lows, stocks jumped an average of 32 percent over the next 12 months, which is more than double the average performance for stocks in all years. Significantly, in 2019 we will be entering the third year of a presidential term, which is historically the strongest year for stocks.

Here are some other historical patterns that should not be ignored. U.S. stocks typically perform poorly leading up to midterms. From January to October in such years, stocks declined an average of roughly 1 percent, whereas in all other years, stocks rose roughly 7 percent in that time frame. This year has been different. From January to October, the Dow Jones Industrial Average increased roughly 1.6 percent, which is better than the long-term average.

No one has a definitive answer for this historical pattern. The one sure thing is that markets hate uncertainty, which might explain why investors tend to pull in their horns until the results of midterms are clear. It’s been said that history repeats itself, which is not to be taken literally. But in making rational decisions it’s better to have history on your side than against you. Which brings us back to Buffett’s advice not to mix politics and investing.

Robert Hebert

economist

Baton Rouge