To The Moon

Last November, I discussed the tendency of the US markets to be bullish following midterm elections. Historical data indicated that the average returns for the S&P 500 six and twelve months after a midterm election were 15.1% and 16.3% respectively. (Source: https://finbiteinsights.substack.com/p/us-stocks-have-always-been-bullish)

So far, this trend has held true as the US stocks have surpassed expectations, despite various challenges such as inflation, rate hikes, recession risks, bank failures, and the debt ceiling. By May 8, 2023, which marks six months after the midterm election, the S&P 500 had risen by 8%.

If the statistics continue to hold, it is likely that positive returns will persist until November 2023.

Additionally, there are two other relevant statistics worth mentioning. According to an article published on MarketWatch (source: https://www.marketwatch.com/story/history-shows-stock-markets-bullish-momentum-in-the-first-half-could-spill-over-into-the-second-half-but-analysts-are-not-so-sure-193e4e61), historical data shows that when the S&P 500 rose by at least 14% in the first six months of the year, it climbed an average of 4.3% in the second half. Similarly, for the Dow industrials, if the first half gains were 2% or higher, the index posted average gains of 6.2% in the second half, according to Dow Jones Market Data.

Screenshot from MarketWatch

In the current year, both of these criteria have been met, as the S&P 500 and Dow Jones have gained 15.9% and 3.8% respectively. It is worth noting that out of 16 instances, the S&P 500 was down in the second half after a strong first half on six occasions. However, there is still a 63% chance that the second half will yield gains, indicating favorable odds for the bulls.

The second statistic pertains to the US Presidential Election Cycle. Since 1928, the third year of the presidential cycle has generated positive S&P 500 returns 78% of the time, compared to 75% in the fourth year, and only 58% and 54% in the first and second years respectively. Moreover, the third year has historically produced the highest average returns, with an average of 13.5%, compared to 6.7%, 3.3%, and 7.5% for the first, second, and fourth years respectively.

Screenshot from CFA Institute

Given that 2023 is the third year of President Biden's term and he is seeking re-election in 2024, the impressive performance of the S&P 500 so far aligns with this historical pattern. It is worth mentioning that if one party holds the majority in both the Senate and the House, in addition to the presidency, the third and fourth years of the presidential cycle tend to underperform, with a 35-38% chance of positive returns.

However, this trifecta effect does not apply currently since the Democrats hold the presidency while the Republicans hold the majority in both the Senate and the House. Therefore, the Democrats need to make additional efforts to create favorable conditions and increase their chances of re-election.

In summary, the combined evidence from the midterm election, first-half bullishness leading to second-half bullishness, and the presidential election cycle all indicate a bullish outlook for the second half of 2023. Therefore, it would be premature to dismiss the bullish market sentiment at this point.