Midterm elections spur uncertainty in markets

Voters file into the hall as early voting begins for the midterm elections at the Citizen Service Center in Columbus, Georgia on October 17, 2022.

Cheney Reuters

Investment advisors say it’s not wise to try to time the market, but it makes sense to adjust your portfolio from time to time. So with the midterm elections a week away and the results still out of focus, does it make sense to make those adjustments now?

Probably not, say many financial advisors.

“Investing based on political beliefs or what you think might happen politically is an emotional decision, and emotional decisions don’t work well when it comes to investing,” said certified financial planner Shawn Melby, founder of Nashville, Tennessee-based Melby Wealth Management. .

He pointed to the Point Bridge America First ETF fund, which trades under the symbol MAGA and was marketed as a way to invest in companies aligned with Republican beliefs. From its inception on September 7, 2017 through election night on November 3, 2020, MAGA returned 6.85%, while the S&P 500 ETF SPY returned 36.10% during the same period, according to Tradeweb.

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Electoral influence, policy outcomes are moving targets

There is also uncertainty in the results. While polls suggest Democrats may lose control of Congress, polls aren’t polls. And even if you predict the outcome of a vote, you can still be wrong about its impact.

“Like most market events, you can be 100% right on the timing or the outcome, but you can be wrong about how it affects the stock market,” said Kevin J. Brady, a CFP and New York-based vice president of Wealthspire Advisors. “It doesn’t really matter which political party is in power so many predictable outcomes.”

Policy outcomes are also a moving target, making it challenging for you to invest based on what might happen.

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“Policies are very difficult to enforce, so you usually have a good lead time to deal with whatever those policies are,” said Taylor Sutherland, senior wealth adviser at Hulbert Hargrove., At No. 8 on CNBC’s 2022 FA 100 list.

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

Financial advisors say it’s best to adjust your portfolio based on your financial goals rather than the outcome of any event. And it’s best to consider the overall economic outlook.

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

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The market has a ‘very different’ midterm pattern

Historically, stocks perform better after midterm elections. In 17 of the 19 midterm elections since 1946, stocks performed better in the six months after the election than in the six months before.

“If you look at its history, the market has a very different trading pattern during midterm election years, with the first six to nine months being 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 usually loses seats. If we have similar results this year and there is a divided government, Orlando says the stock market could rally 15% to 20% in the spring. But after November 8 there will be time to adjust and the results and economic outlook are more clear.

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


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