Yesterday I said I'll leave the historical post-mid-term-election equity market performance to others... Today I'm thinking I'll go ahead and offer some of that up, but I'll narrow it to what are the most-relevant analogues... And please know that this is for the sole purpose of maybe calming a nerve or two after today's meltdown in global equities.
Now, before I proceed to copy and paste the data Claude produced for me, also know that it's only your (our clients') nerves that motivate me... As for myself, after managing through all of the trends and gyrations the past 42 years has offered up (yes, I was a baby when I started -- I figure I'm about midway through my career at this point 😎), and studying virtually all of the pre-my-career market history, while I can't say that markets never surprise me, I'll just say that I'm never surprised that markets still at times surprise me...
That last part makes sense, right?
My message to you clients being that we here at PWA simply don't get rattled; times like these just sharpen our already razor-sharp focus... That's important for you to know, if/when you happen to get emotionally rattled by the markets.
Now, to the history that, while being interesting, offers merely emotional value -- as the future is yet to be discovered... Which, being forever the case, leaves zero room for complacency on our part.
Query: Show me the closest post-mid-term matches for the present, for the S&P 500. Then show me the immediate market response, and results up to 6 months out.
Response: The best matches are 1986, 2006 and 2018. In each, a Republican president faced divided government after the vote (Democrats took both chambers in 1986 and 2006, the House alone in 2018), the market was up for the year going in, and the year’s peak-to-trough drawdown was shallow (8–10%).
In the first two days the reaction was muted. In 1986 and 2006 the index barely moved, about +0.2% on day 1 and slightly negative by day 2. 2018 had the strongest pop, +2.1% the day after, and it was still up 1.9% on day 2.
After the first week the three paths split:
- 1 month: 1986 +2.8%, 2006 +1.8%, 2018 −2.2%.
- 3 months: 1986 +13.6%, 2006 +4.9%, 2018 −0.9%.
- 6 months: 1986 +17.5%, 2006 +9.2%, 2018 +6.4%.
So the average was about +1% at one month, +6% at three months and +11% at six months. All three were positive at six months, but the ride was uneven. 2018 dropped nearly 15% before the Fed pivot rescued it.
The takeaway is that the post-midterm tailwind has held up even from extended starting points, but it has been smaller and bumpier than the headline averages suggest. From here, positioning, the Fed and earnings will matter more than the election calendar.
I'll close by quoting myself from the past two posts.
Tuesday:
"...as I keep stressing, the present and go-forward macro regime is vastly different than the one that has occurred over the past four decades... Which, indeed, demands that we (PWA) forever identify where we are in the business and capital cycles, as well as in the slower moving macro and policy regimes that meander through time.
While our core allocation -- remaining notably diversified -- effectively captures our long-term thesis, we nevertheless expect quite the bumpy ride heading into 2027.
Bottom line: Our patience (remaining non-reactive to short-term swings), while painstakingly assessing, and reflecting, long-term conditions and setups, is essential to our clients' long-term investment success."
Yesterday:
"My personal experience over the years has borne this out over and over again… When we’re talking cyclically, markets will do what they do based on where we are in the business and the capital cycles… When we’re talking structurally, we need to know where we are in terms of structural regimes, be they capital friendly or labor friendly… Another name for the latter is populism… My point being that the party in power will absolutely bend to the constraints and the incentives the reigning structural dynamic dictates.
I.e., in a populist regime, which is where we live today, globally, the constraints and incentives lend themselves to policies that on-balance favor the real economy over the financial economy, that lean on fiscal policy over monetary policy, and that promote structural inflation over disinflation.
Bottom line, a smartly allocated long-term portfolio today will express that structural view, while tactically accommodating the shorter-term cyclical trends and counter trends along the way.
As for the time being, like I said yesterday, the near-term setup looks plenty bumpy heading into 2027, today’s breathtaking rally notwithstanding."
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