What Do They Mean For Markets?

Midterm Elections—What Do They Mean For Markets?

Sep 16, 2022

It’s almost Election Day in the US once again. For those who need a brief civics refresher, every two years the full US House of Representatives and one-third of the Senate are up for re-election. While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on midterm elections?

Markets Work

We would caution investors against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the aggregate expectations of those investors. This makes outguessing market prices consistently very difficult^_.1 While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors.

The 2016 presidential election serves as a recent example of this. There were a variety of opinions about how the election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected.² The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move, especially given the narrative at the time.

But what about congressional elections? For the upcoming midterms, market strategists and news outlets are still likely to offer opinions on who will win and what impact it will have on markets. However, data for the stock market going back to 1926 shows that returns in months when midterm elections took place did not tend to be that different from returns in any other month.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926–June 2022. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a midterm election was held, with red meaning Republicans won or maintained majorities in both chambers of Congress, and blue representing the same for Democrats. Striped boxes indicate mixed control, where one party controls the House of Representatives, and the other controls the Senate, while gray boxes represent non-election months. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election. Results similarly appeared random when looking at all Congressional elections (midterm and presidential) and for annual returns (both the year of the election and the year after).

Exhibit 1

Midterm Elections and S&P 500 Index Returns, Histogram of Monthly Returns

January 1926–June 2022

In It For The Long Haul

While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. Exhibit 2 shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. Again, the chart lays out party control of Congress over time. And again, both parties have periods of significant growth and significant declines during their time of majority rule. However, there does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter. Markets have historically continued to provide returns over the long run irrespective of (and perhaps for those who are tired of hearing political ads, even in spite of) which party is in power at any given time.

Exhibit 2

Hypothetical Growth of $1 Invested in the S&P 500 Index and Party Control of Congress

January 1926–June 2022

Equity markets can help investors grow their assets, and we believe investing is a long- term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns.

Source: Dimensional Fund Advisors

Golf Tip of the Week

How To Play A Tricky Par 5

Consider ditching the driver and laying up

In my years as a head pro in the beautiful Sierra Nevada of Northern California, I’ve come to love mountain golf and the unique challenges it brings, including the occasional tricky par 5 that hugs the hills. Not only is the golfer dealing with sometimes extreme elevation changes, high-altitude air, and distracting vistas, but there’s something about being up there among the tall peaks that makes a player want to go for it. Why not? You didn’t come all this way to lay up.

Then again, sometimes leaving the Big Dog in the bag and taking on a wily, winding mountain hole is exactly what you need to do to chart a proven course to par, or even birdie.

So, here we are on the 12th hole at Grizzly Ranch, my home course tucked among forested peaks about an hour northwest of Reno, Nevada. It’s a long par 5 but, as I said, you don’t necessarily want to break out the big stick here. Most golfers go straight to their driver instead of looking at their yardage guide, where you can learn a lot about what an architect had in mind for each hole.

No. 12, for instance, is a nicely designed hole by Bob Cupp, a player’s designer who wants you to use every club in the bag. Ideally, it’s a conservative play off the tee, and you can be a little more aggressive after that. You run out of real estate in two spots after your first shot, and on your second shot you have to hit over a ravine.

The Tee Shot: Easy Does It

The first shot, you want to be conservative — center of the fairway, 270 yards is the most you want to hit it from the back tees. I go back further than that, about 230 yards. Left and right are trouble and too far is serious trouble. You want to get into a nice landing area, a flat spot. This is mountain golf, and the ball can easily end up below or above your feet. A good target is the cart path on the left.

If you play from one of the “up” tees, you have a different decision to make. Our white or copper tees are the most commonly played. If you’re a first-time player, you might not have an idea that you have about 235 yards before you run out of fairway. To the left it’s even less. Play the number that’s on your placard. Some guys think they can fly the ditch, but everything slopes right and kicks you into the hazard. So again, you want to play it safe, about a 200-yard club from these tees, center of the fairway. You want to avoid left and right, where you’ll get severe lies.

Second Shot: Stretch It Out

For my second shot I can actually hit a longer club and be more aggressive. I have a 5-wood and want to play it left-center of the fairway, since it moves left to right. I want to play the golf course and let it do the work for me. Then I’ll have a reasonable shot into the green. I’m aiming at the green box on the left, a very specific spot, which helps me focus.

Third Shot: Easy Way Home

Now we are laying two on this long par 5, and we’re on a nice, ideal flat spot. I have about 130 yards to the pin, a good distance to put it close with a chance for birdie.

Tip adapted from golftipsmag.comⁱ

Recipe of the Week

One-Pot Lasagna Soup

4 servings

Ingredients

• 1 tbsp extra virgin olive oil
• 1 brown onion, finely chopped
• 400g beef mince
• 2 garlic cloves, crushed
• 2 tbsp plain flour
• 2 tbsp tomato paste
• 500g jar tomato pasta sauce
• 1 liter salt reduced chicken style liquid stock
• 5 dried lasagna sheets
• 2 tbsp milk
• 2 tbsp chopped fresh flat-leaf parsley leaves, plus extra to serve
• 2 tbsp chopped fresh basil leaves, plus extra to serve
• 1/2 cup grated mozzarella
• 1/4 cup finely grated parmesan

Instructions

Recipe adapted from taste.com.auⁱⁱ

Health Tip of the Week

Age-Defying Energy Levels

Getting older doesn’t automatically mean less vibrancy and vigor, or lower energy levels—no matter what our youth-obsessed culture would have you believe.

That said, there are a few key principles that can give you a boost as you age. Here’s how to get more energy.

Eat (mostly) whole foods.

Fresh, whole, unprocessed foods renew energy levels with vitamins, minerals, and antioxidants.

“Packaged, processed foods tend to make you feel sluggish and heavy,” says Johns Hopkins geriatrician Alicia Arbaje, M.D., M.P.H.

Eat animal products (especially red meat) in moderation—they take longer to digest, which saps energy.

Check your vitamin D.

Vital for energy levels and mood, vitamin D is best taken in through a little sunshine; when UV rays hit the skin, they get transformed into D.

The bad news: As you age, your skin gets less efficient at converting sunlight to D.

“I don’t usually recommend supplements, but a vitamin D supplement is often a smart idea,” says Arbaje. “You can ask your doctor for a test to find out if you’re deficient.”

Revitalize with vitamin B12.

Another vitamin that’s key for energy levels is B12. It’s found naturally in animal products (remember moderation). Many nondairy milks (such as soy and almond) are fortified with B12 too.

Move more.

Even a few minutes of movement a few times a day can prevent dips in energy levels. If you can, take a walk in the morning sunshine.

You’ll get energized for the day, and the dose of early sun helps regulate your circadian rhythm, which helps you sleep better at night.

Review your medications.

Many drugs—including high blood pressure medications, antidepressants, and antihistamines—have side effects that can sap energy levels.

“Every three to six months, review all of your meds with your primary care doctor and ask: ‘Do I still need this? Can I lower the dose? Are there alternatives?” says Arbaje.

Tip adapted from hopkinsmedicine.orgⁱⁱⁱ

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Sources:

1. This is known as the efficient market theory, which postulates that market prices reflect the knowledge and expectations of all investors and that any new development is instantaneously priced into a security.
2. Examples include: “A Trump win would sink stocks. What about Clinton?” CNN Money, 10/4/16, “What do financial markets think of the 2016 election?” Brookings Institution, 10/21/16, “What Happens to the Markets if Donald Trump Wins?” New York Times, 10/31/16.

In USD. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.

There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Disclosure:

Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.

Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.

This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.

No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.

Advisory services through Ballentine Capital Advisors, Inc.

ⁱ https://www.golftipsmag.com/instruction/strategy-troubleshooting/how-to-play-a-tricky-par-5/
ⁱⁱ https://www.taste.com.au/recipes/one-pot-lasagne-soup/FgfIBFiy
ⁱⁱⁱ https://www.hopkinsmedicine.org/health/wellness-and-prevention/age-defying-energy-levels