Do stock markets fall in midterm election years? What 45 years of data shows

Five minutes a week that makes you smarter and calmer about your own money — plus a look at what I’m actually doing with mine…

There are seventeen weeks left in the year, and two important things coming up:

On 28th October the Chancellor delivers the UK Budget. Six days later, America votes in its midterm elections. Expect the market to be jumpy between now and then.

I want to show you why that’s normal. Markets aren’t frightening if somebody warns you first!

Markets have a reputation for disliking the run-up to an American midterm election and then enjoying the aftermath. I wanted to verify this was actually true, not just an urban myth, so I looked at every S&P 500 quarterly close, right back to 1980.

It’s not a myth. In midterm years the market goes nowhere for nine months, then makes its money in the final quarter.

That last quarter has been worth 6.5% on average in midterm years, against 3.9% in ordinary ones, and it has been positive in nine years out of eleven. Not all of them: the final quarter of 2018 fell 14%. Eleven years is a small sample, and this is a pattern, not a law.

What it means for you: Nothing needs doing. A choppy October is normal for this point in the four-year cycle. One caveat — this year is already up about 12%, nothing like the flat midterm average, so we may have had the good part early. Or there may be more to come — nobody knows!

We started this year expecting cheaper money (lower interest rates) by Christmas. That expectation is falling apart in front of us.

America’s central bank held rates in July, but three of its policymakers voted for a rise instead. By the end of August the market was putting the odds of an increase this month at about two in three.

It’s the same in the UK. The Bank of England held at 3.75%, three of its nine wanting more, and inflation has crept back up to 2.9%. Both banks decide again this month — America on the 16th, us on the 17th.

Confirmed: Wednesday 28 October, delivered by Chancellor John Healey.

There’s a great deal of speculation about what’s in it. I’m not adding to it, because nobody outside the Treasury knows. What’s already decided matters more than the rumours — from April 2027 the cash ISA allowance drops from £20,000 to £12,000 for the under-65s.

You can see every position I hold, and what each has done, on the portfolio pages.

No trades this week. I’ve been working on something else.

The portfolio has two pools doing very different jobs. The Foundation captures the market’s return at the lowest cost I can find. Outsized Returns sits at the far end: turnaround companies bought cheap, where the goal is to double or treble in two to three years.

What’s missing is the bit in the middle — the rock-solid, dependable businesses you buy once and hold forever while they quietly compound. I own them today, but only through the ETFs, where they are mixed in with hundreds of companies I’d never pick myself. I want them held deliberately in a concentrated way.

So I’m building a third pool. Full members will hear more soon, and get the full holdings — what I’m buying and why.

Four times a year, the officials who set American interest rates each write down where they think the rate will be at the end of this year, next year and the year after. The guesses are plotted as dots — one per person, no names attached — and published. The next lands on 16 September.

It’s the closest the central bank comes to telling you its plans, which is why it gets over-read. Nobody is committing to anything. Each dot is a best guess on the day, and when the facts change the dots move.

Watch it for the direction, not the destination.

“Get out before the election, buy back in afterwards.”

It sounds like prudence. The wobble is coming, so you step aside and return when the coast is clear.

The record disagrees. Sitting in cash from the end of September to January in a midterm year would have parked you on the sidelines for the best quarter of the cycle — about £650 of missed return on every £10,000, for the privilege of feeling organised.

And that assumes you get back in. People sell because they’re nervous, and nervous people don’t buy on the morning the result lands. They wait for confirmation, which turns up after the recovery.

Hawkish and dovish — which way a central banker leans. A hawk worries about inflation and wants rates higher. A dove worries about jobs and growth and wants them lower. A meeting described as hawkish means the room has tipped towards higher rates for longer.

Book of the week: Investing for Growth, by Terry Smith. Smith runs Fundsmith and has built a career on exactly the kind of business I’m building the third pool around. His strategy fits on a postcard: buy good companies, don’t overpay, do nothing. The chapter on doing nothing is worth the cover price. Check it out here.

Know someone who’s about to panic-sell because of an election they can’t even vote in? Forward this to them.

See you next week.

Tim

I am not a financial adviser. Nothing here is personal financial advice. Please do your own research before making any investment decisions.