Bear Markets and Midterms: History Offers Few Clues About Voter Responses
The Dow Jones Industrial Average dropped 1.1% on September 26 to close at 29,260.81, down more than 20% from its previous high in January 2022. It closed down another 125 points on Tuesday.
Exact definitions of a “bear market” vary, but a commonly used benchmark is when an asset drops 20% or more from a previous high.
No two bear markets are exactly alike. This year, prolonged economic uncertainty and supply chain issues, the war in Ukraine, and big interest rate hikes by the Fed to tame inflation are obvious reasons why investors have retreated.
Historically, the average bear market lasts 289 days, according to an analysis by Forbes. The last time the Dow entered bear territory was March 11, 2020, in a rapid plummet in the first days of COVID shutdowns. Within two weeks, however, the market was back up, beginning a bullish stretch that continued until earlier this year. Bull markets tend to last much longer, averaging 991 days.
With just six weeks to go before the midterm elections, could a bear market affect the results? There has been a lot written about the reverse: how midterm elections affect markets. After all, shifts in political power affects policy, and policy can impact the economy and signal to investors what might lie ahead. But as for the effect of markets on midterms, it appears stock prices do not seem to matter much.
After conducting an in-depth study of midterm elections from 1950 to 2014, Keith Parker, chief equity strategist at UBS, concluded, “We sliced the data every way possible. A strong market going into the election doesn’t necessarily help the incumbent’s party.”
Perhaps surprisingly, based on recent midterm results, the same was true for the overall health of the economy. It turns out that, going back a century, financial markets tend to be a little anemic during non-presidential election years, which also suggest the ups and downs of the market aren’t necessarily strong predictors of voter behavior.