Politics and your portfolio: Midterm elections create uncertainty for markets

Personal finance

Voters file down the hall as early voting begins for the midterm elections at the Citizens Service Center in Columbus, Georgia, on Oct. 17, 2022.
Cheney Orr | Reuters

Investment advisers say it’s not wise to try to time the market, but it does make sense to periodically adjust your portfolio. So with the midterm elections now a week away but the outcome still not in focus, does it make sense to make those adjustments now?

Probably not, say most financial advisors.

“Investing based on political beliefs or what you think may happen politically is an emotional decision, and emotional decisions in regard to investing tend to not work very well,” said certified financial planner Shaun Melby, founder of Nashville, Tennessee-based Melby Wealth Management.

He points to the Point Bridge America First ETF fund, which trades under the symbol MAGA and was marketed as a way to invest in companies that align with Republican beliefs. From its inception in Sept. 7, 2017 through election night of Nov. 3, 2020, MAGA returned 6.85%, while, the S&P 500 ETF SPY returned 36.10% over the same time, according to Tradeweb.

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Election impact, policy outcomes are moving targets

There’s also uncertainty in the outcome. While the polling suggests that Democrats could lose control of Congress, polls are not elections. And even if you did predict the vote outcome, you still might end up being wrong about its impact. 

“Like many market events, you can be 100% correct on the timing or outcome, but wrong about how it impacts the stock market,” said Kevin J. Brady, a CFP and a New York-based vice president at Wealthspire Advisors.  “It’s not really that important what political party is in power so much is that there’s more predictable outcomes.”

Policy outcomes are also a moving target, which makes it challenging to invest based on what you think might happen.

“Policies are pretty difficult to get put into place, so you have generally pretty good lead time to deal with whatever those policies may be,” said Taylor Sutherland, senior wealth advisor with Halbert Hargrove, ranked No. 8 on CNBC’s 2022 FA 100 list.

“Policies often change right up until they are finished,” he added, pointing to President Joe Biden’s infrastructure bill, which started as a $3 trillion proposal but ended up at $1 trillion, with many changes in the details.

Financial advisors say it’s best to adjust your portfolio based on your financial goals and not on the outcome of any event. And it’s best to consider the overall economic outlook.

Sutherland says his firm adjusted portfolios in late 2021 into early 2022 as economic signals changed and inflation started to heat up. “Those signals indicated to us it was time to get defensive,” he said. “So we traded out of stocks and into cash for a portion of our client’s portfolio, and we’ve maintained that position all year.”

The market has a ‘very distinct’ midterms pattern

Historically, stocks tend to do better after midterm elections. In 17 of the 19 midterm elections held since 1946, stocks performed better in the six months after the election than they did in the six months prior. 

“If you look at the history of this, the market has a very distinct trading pattern in midterm election years, in which the first six to nine months tends to be very rocky,” said Philip Orlando, senior vice president and chief equity market strategist at Pittsburgh-based Federated Hermes.

The party that controls the White House typically loses seats. If we have a similar result this year and there is divided government, Orlando says the stock market could stage a 15% to 20% rally into spring. But there will be time to adjust after Nov. 8 and the outcome and economic outlook are more clear. 

“That may be an interesting time to start picking up some high-quality oversold growth stocks,” said Orlando.

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