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Democrats won control of both the House and the Senate in the Nov. 3 midterm elections. That means President Trump will spend his final two years in office working with a Congress controlled by the other party. If you're wondering what this means for your portfolio, history offers some useful perspective.
Here's a statistic that sounds extremely reassuring. The S&P 500 has been higher 12 months after each of the 19 midterm elections since 1950, with an average gain of about 15%.
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Even the weakest stretch, which included the 1987 crash, ended with a small gain. But the stock market has never been lower a year after a midterm election.
Five presidents since 1950 have served two full terms, and their final two years tell a mixed story. Here's how the S&P 500 did, including dividends:
Dwight Eisenhower: 12% in 1959 and 0.5% in 1960.
Ronald Reagan: 5.3% in 1987 and 16.6% in 1988.
Bill Clinton: 21% in 1999 and a 9.1% decline in 2000.
George W. Bush: 5.5% in 2007 and a 37% decline in 2008.
Barack Obama: 1.4% in 2015 and 12% in 2016.
One key takeaway is that the year after the midterm was positive all five times. The final year was more mixed, with two big declines. But it's worth noting why. The 2000 drop came as the dot-com bubble burst, and the 2008 drop was during the financial crisis. Neither had much to do with who controlled Congress.
Three of those presidents, Eisenhower, Reagan, and Bush, faced a Congress controlled by the other party in their final two years, just as Trump will. The results ranged from excellent to the 2008 crash. Over a longer period, RBC data shows that years with a Republican president and a Democratic Congress have averaged about a 5% annual gain, the lowest of any combination. Of course, that average is based on just a handful of periods, so I wouldn't read too much into it.
In short, history suggests that the year after a midterm tends to be good for stocks, and that a president's final stretch depends far more on the economy than on politics. Earnings, interest rates, and economic growth will drive the market over the next two years. My plan is the same as always. I'll stay invested and keep buying great businesses, no matter who controls Washington.
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The Midterms Are Over. History Says This Is What the Stock Market Does Next. was originally published by The Motley Fool
