Fresh attacks by Iran's Houthi allies and a storm that shut some U.S. offshore production have given a fresh boost to oil prices, putting more pressure on stocks globally. A solid 10-year Treasury note auction Wednesday offered a reprieve for stocks, but the effect is fading. Futures point to a second straight day of declines for U.S. benchmarks today after they hit records.
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Midterm break
It seems like an odd time for American stocks to be hitting fresh records.
Glancing at the political calendar, though, the gains are happening right on schedule. The fourth quarter of a midterm election year has been among the best times to own the S&P 500. The index's average return for those quarters since 1950 has been 6.6% or an excellent 29% on an annualized basis.
The full "Presidential Cycle" of investing returns is well-known: On that basis, the full calendar year before a presidential election-2027 is the next one-has had the best returns, on average. It probably has to do with the timing of spending and taxation and a sitting president's unique ability to help his own cause or that of his anointed successor.
The reason the period right around midterms is so good for stocks is thought to be the opposite-what Washington can't do. Investors like gridlock, and they often get it in the middle of a president's term when Americans are getting tired of him and his party. A sitting president's allies have lost seats in Congress nearly every time in the past century in midterms.
But inactivity might not be the biggest factor. What investors seem to like even more than politicians being stymied is political certainty.
A study published five years ago in the Journal of Financial Economics looked at 145 years of data and showed that gains mostly happen after the midterm election itself. U.S. equity premiums-their return over risk-free assets-averaged an annualized 15.4% in the five following months compared with 3% in all other months.
For Treasurys, the inverse has held true. Returns have tended to be worse than usual after a midterm election. That might be because, fearful of an outcome they don't want politically, investors buy Treasurys in a flight to safety and then unwind the trade after the fact.
Naturally, the effect on stocks and bonds can and often does bleed over to the period before the election when investors are more confident about the outcome. This seems like one of those years, with the implied chance of Democrats winning back a majority in the House of Representatives at 93% on betting site Polymarket on Wednesday. It was 65% for the Senate.
An unusual outcome in 2002 during George W. Bush's first term provides more evidence that political paralysis isn't necessarily the reason investors rejoice. That was the last year a president's party gained control of Congress in the midterms. The S&P 500 rose by a robust 7.9% that quarter, rebounding from a sharp bear market.
The important thing isn't so much who's in power as knowing who's in power.