The U.S. stock market was riding high heading into Memorial Day weekend, as the S&P 500 cemented an eighth straight week in the green on Friday — its longest winning streak since 2023.
Major indexes have continued to climb, even as rising bond yields around the world have started to ratchet up the pressure. Yet as June nears, technical strategists are offering a word of caution.
The summer months of midterm-election years tend to be tough for the stock market, according to an analysis by Dow Jones Market Data. It showed an average loss of 2.8% for the S&P 500 from the end of April to the end of September in those years.
That isn’t the way this midterm stretch has started out. Instead, the index has gained 3.7% so far in May. Historically, a few large losses do skew the data set somewhat. During the same stretch in 1930, the S&P 500 fell by more than 25%. During 1974, it fell by 29.6%. In 2002, it was down 24.3%. These were all midterm-election years.
Even not including those years, the index’s historical performance was only marginally higher — an average gain of 0.006%. Yet even though stocks have continued to trade in record territory lately, the Cboe Volatility Index remains at 16.7%. Analysts including Nomura’s Charlie McElligott point out this is an unusually high level for the VIX with the market in such a strong uptrend. It could signal that something is amiss beneath the surface, according to McElligott.
Professional investors have thoughts on this generally rough patch for stocks. During midterm-election years, investors often grow more uneasy as the focus shifts from corporate earnings and the economy to the political fight over control of Washington, according to Jeffrey Hirsch, chief executive of Hirsch Holdings and the editor in chief of the Stock Trader’s Almanac.
There is usually a “whole ramp-up of politicking about who takes control of Congress,” and the president’s party often loses seats, Hirsch said in a phone interview. That uncertainty can weigh on investor sentiment, especially during a part of the year that tends to be difficult for stocks even under normal conditions.
The “weak spot” of the four-year presidential cycle tends to fall in the second and third quarters of midterm-election years, or roughly from April through September, according to the Stock Trader’s Almanac. While Hirsch said he does not expect stocks to fall into a bear market for that stretch this year, he said the market could be at least “sideways choppy.”
Jay Hatfield, chief executive at Infrastructure Capital Advisors, pointed to overall seasonal risks, noting that May and September have historically been weaker months for stocks.
Part of that pattern reflects the rhythm of the market calendar, Hatfield said. “Greed occurs during earnings seasons and fear after,” he said in a phone interview. In other words, earnings periods tend to bring company-specific good news that can support stocks, while the stretches after earnings often leave investors more focused on macroeconomic risks, politics and geopolitics.
That dynamic has been especially visible this year, Hatfield said. Strong corporate earnings have helped support the market, particularly in areas tied to artificial intelligence and technology. But outside of earnings season, investors must contend with worries about the Iran conflict, higher oil prices and the risk that renewed inflation pressures could complicate the Federal Reserve’s path on interest rates.
Still, Hatfield said the upcoming midterm elections could ultimately lead to a more positive setup for markets historically: divided government. Republicans currently control both chambers of Congress, with a 53-47 effective majority in the Senate and a narrow edge in the House. Democrats are widely seen as having a clearer path to victory in the House than the Senate, although both outcomes remain uncertain.
A divided Congress could make it harder for either party to pass major changes to taxes, spending or regulation. That would come against a backdrop in which corporate taxes remain low by historical standards, reducing the risk of major policy shocks, Hatfield said.
“Gridlock is generally great for stocks,” he added.
Historical patterns are only a guide, not a rule. Each midterm election unfolds against a different economic and political backdrop, and this year’s outlook could still be shaped by inflation, the Federal Reserve and the standoff over control of the Strait of Hormuz.
The S&P 500, Nasdaq composite and Dow Jones Industrial Average all finished higher on Friday, with all three indexes tallying weekly gains.
Comments