Do stock Markets Typically Rally After Midterm Elections?
What You Need to Know for Your Investments – 2023 economic outlook
By Floyd Saunders, Founder of Really Simple Investing
Stock markets has a history of underperforming in years leading up to midterm elections while doing significantly better after the ballots have been cast.
Looking back as far as 1962, the average annual return of the S&P 500 in the 12 months before a midterm election has been -0.7 percent, compared to an average of 8.1 percent for all years from 1962 to 2022. After midterm elections the index has outperformed its long-term average in
the 12 months after a midterm election, with an average return of 16.3 percent. So smart investors who have been sitting on the sidelines waiting for a rally in the price of stocks might want to start buying stocks again.
But, the biggest market influencer in midterm election years is really the health of the overall economy, which is why many investors are not expecting a big post-election bump in the months ahead. Inflation is still high, interest rates are rising and global crises are causing more people to be concerned about a recession in 2023. These fears, real and otherwise, are very real and will dampen any post-election bump in stock prices for 2023.
As the chart shows, the stock market in 2022 is currently headed for its worst year since 2008. Even in 2020, when the Covid-19 pandemic sent markets into turmoil, the recovery was swift and stocks rallied for much of the second part of the year.
According to macrotrends.net, the S&P 500
has only ended the year down more than 20 percent twice in the 21st century: in 2002 and in 2008.
Recession or no recession, stocks look poised to run higher late in 2023. According to Luke Lango, A Senior Investment Analyst at InvestorPlace, there will only be mild recession in 2023, which he rates as very likely, and he goes on to predict. a moderate recession is somewhat likely.
What is likely to be happening thru the end of 2022 is the stock market is fully priced for a moderate recession going into 2023.
Stocks Could Rally Even If a Recession Strikes in 2023
Every time the S&P 500’s EPS drops during a recession, the S&P 500’s P/E multiple tends to pop into the 23X to 30X range. This happened in the late 1980s, early 1990s, early 2000s, 2008/09, and 2020.
How Recessions Impact Earnings
Only two things really drive the price of stocks: earnings and the multiple that investors are willing to pay for earnings. (Earnings (x) P/E Multiple (=) Stock Price.). Recessions always negatively impact earnings. But the really important question is by how much. Potentially 2023 will be one of three types of earnings recessions:
1. Shallow: EPS tends to drop about 10%.
2. Moderate: EPS tends to drop about 20%.
3. Severe: EPS tends to drop over 40%.
The S&P 500’s EPS is likely to be around $225 at year end. Therefore, a shallow recession would bring 2023 EPS to about $200, while a moderate one would push 2023 EPS down to $180. Here is a round of predictions on a recession from economists and CEOs at some of the largest banks in the United States.
Looking at the potential for a recession in 2023, Fitch Solutions expect that growth will slow from 1.8% in 2022 to 0.3% in 2023, with a shallow recession in the latter part of 2023 with robust U.S. consumer finances helping to cushion its impact.
"The projected recession is quite similar to that of 1990–1991, which followed similarly rapid Fed (Federal Reserve's) tightening in 1989–1990," said Olu Sonola, head of the Fitch Ratings U.S. regional economics.
Goldman Sachs Chief Executive Officer David Solomon told Reuters ". . . it is possible that inflation can be tamed without causing too much economic pain. There's a reasonable chance of a recession in the U.S., but it's not certain," Solomon said "I could still see a scenario with a soft landing."
Solomon's comments echoed those of JPMorgan & Co CEO Jamie Dimon in expressing caution about the economic outlook. The CEO at Bank of America Corp, Brian Moynihan, has been more optimistic, pointing to the healthy finances of consumers and businesses.
Economists from the Federal National Mortgage Association are also predicting that a recession will start in early 2023.
Their expectations are for total economic growth through 2022 to hit 0.1%, with this sliding to -0.4% over the course of 2023. These figures are revised down from a decline of -0.1% in 2023.
Investors can now expect a recession to begin in the first quarter of 2023, due to interest rates hikes required of the Federal Reserve to bring inflation down from its current decade-high levels. By year-end 2022, some estimates of inflation, see continued moderate declines in inflation to 5.7 percent, down from the June reading of 9.1 percent, and then to 1.6 percent by the end of 2023, below the Fed’s 2-percent target.
Two indicators that bear watching are consumer confidence and jobs.
Here are the to indicators that every investor should be keeping an eye on now: Consumer Confidence and Jobs.
The Conference Board Consumer Confidence Index decreased in October after back-to-back monthly gains. The Index now stands at 102.5 (1985=100), down from 107.8 in September.
Total employment increased by 261,000 in October, and the unemployment rate rose to 3.7 percent, according to the U.S. Bureau of Labor Statistics. Job gains occurred in health care, professional and technical services, and manufacturing.
According to the Conference Board, rising interest rates will push the US economy into a broad-based recession for much of 2023, ending in the third quarter. A recession will impact extremely tight labor markets and drive the unemployment rate higher, with a peak at 4.5 percent. This reflects severe labor shortages that may continue despite the downturn. Employment has remained strong all of 2022. The U.S. labor market added 3.8 million jobs in the first nine months of 2022 for the second strongest year-to-date gain in over 75 years, according to the Treasury department.
Plus, the Conference Board expects inflation will remain above the Fed’s 2-percent target until at least 2024.
For investors with a long-term view the good news is the S&P 500 has bounced back rather sharply after every recession. And those rebounds often began well before the end of the recession.
The current market downturn provides buying opportunities for anyone with the patience to hold on for a few years. That's true whether a recession is really on the way or not. If you are able to invest in a 401(k) or use dollar cost averaging to fund your investment accounts monthly, hang in there, your average cost for buying stocks will remain lower for the rest of 2022 and the first half of 2023. But by this time next year, you will see many of your stocks at higher prices, especially if you are buying quality stocks that continue to pay out increasing dividends.