To The Moon

The US is holding its midterm election now. But we are not going to talk about politics. We are going to see the impact of midterms on the US stock market.

U.S. Bank did a study of 15 midterm elections in the past 60 years.

The statistics showed that the S&P 500 index underperformed for a year before the election.

The average 1-year return prior to November of a midterm year was -1%. However, the return averaged 11.2% if it was a non-midterm year.

What is more interesting is the returns after the midterms.

3 months after the midterms, the S&P 500 averaged 7.3% return, more than double the returns of 2.9% in a non-midterm year.

There were some periods where returns were negative - 4 out of 15 midterm periods saw S&P 500 declined 3 months after the midterms. That means there is still a 73% chance that S&P 500 would be positive.

The outperformance during a midterm year continued six to twelve months after the election.

6 months after: Midterm year +15.1% vs non-midterm year +4.2%

12 months after: Midterm year +16.3% vs non-midterm year +6.4%

In addition, S&P 500 has always registered a positive return 6 to 12 months after the midterms. The record was flawless.

Why does this anomaly happen?

U.S. Bank analysts reckoned that this is just a coincidence as they found that the health of the economy has a stronger impact to the stock markets than politics.

We are not sure about that as there has been almost zero correlation between GDP growth and stock market returns.

Another explanation is that the newly elected Congress would spend to effect their policies, boosting revenue and profits for certain companies.

Then again, it doesn't benefit the entire market and yet the diversified index outperformed.

The truth is no one knows the truth. All conjectures. But data showed that there is a high chance of US stocks rallying after midterms.