A Mid-Term Gut Check
Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw
Investors are approaching the upcoming mid-term elections with anxious anticipation. The recent rally has likely helped to reduce trepidation. But based on questions we are getting from clients, there is still some concern about how the election results will impact their investments. If history is any guide, they should not be overly worried.
Historically there is no correlation between the party in charge and stock market returns. The US stock market generally goes up over time. Why? Companies are adaptable. The stock market reflects the fortunes of all public companies. These companies are good at adapting and finding a path to profitability regardless of the nuance from one administration to the next. We showed this in Chart 5 of our Q3 2020 Perspectives.
A chart we first introduced during the 2018 midterm elections is perhaps more intriguing for today. The chart looks at stock market performance in the six-month period from November through April in mid-term election years versus Presidential election years. The data goes back to 1930 and shows that months during and after a mid-term election tend to be strong for stock investors. Great! While we like the implications of the chart, as evidence-based investors, we must say that this is not very robust evidence. Yes, the data goes back to 1930, a long time, but that only equates to 23 elections. So still a small sample set.
We show this data not as a prediction that the next six months will be strong but rather to remind investors that as challenging as the current environment feels, the stock market tends to go up, and a mid-term year is as good as any to start the next rally.
The outperformance of Value versus Growth in 2022
The Russell 1000 Value index (down -10.4%) has significantly outperformed the Russell 1000 Growth index (down -26.5%) so far this year.
Stocks ended the week definitively in positive territory despite big misses from some of the market’s heavy hitters, namely Microsoft (MSFT), Alphabet (GOOGL), and, most notably, Amazon (AMZN). The online retailer was down almost 15% on the week. The positive market move gives us our headline of the week.
- The Russell 1000 (US large cap) was up over 2% on Friday and ended the week up over 4%.
- It has been an excellent start to Q4, with US large and small caps up nearly 9% and 11%, respectively.
- The factors leading the market higher are Value and Momentum stocks. Value (VLUE) is up around 14%, while Momentum (MTUM) is up nearly 13%.
Value investors have had to be patient in recent years as growth stocks have been dominant. Recently their patience has been rewarded. Year-to-date, the Russell 1000 Value index is down -10.5%. That may not seem impressive, but the Russell 1000 Growth index is down -26.5%. Outperforming in a downturn is a good recipe for long-term investing success.
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