Post-Midterm Magic for Investors

You’ve heard that if a National Football Conference team wins the Super Bowl in January, it’ll be a bull market that year? Or that when hemlines rise, so do stock prices? And that you should exit equities entirely in the month of October because that’s when bad things happen? Superstitions like those are pretty stupid. (OK, the football thing supposedly is right 80 percent of the time according to one article I read. But shouldn’t we chalk that up to coincidence?) Yet here’s one stock-market “myth” that actually has held up to scrutiny: in the 12 months after a midterm election, stocks rise. I wrote about this phenomenon one year ago. I referenced an article by Stephen McBride, who wrote this in Marketwatch on midterm election day, Nov. 6, last year: “Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one. That’s 18 for 18.” I vowed then to check back in a year. So, did the trend hold? Are we 19 for 19? Yup. Sure are. Since last year’s midterm election, the Dow Jones industrial average increased 7 percent. Likewise, the Standard & Poor’s 500 index and Nasdaq composite increased 12 percent and 14 percent, respectively. Our own index of local stocks, which we call the Valley 50, was up 21 percent. So why is this? Why do stocks go up after a midterm election? McBride theorized that investors – well, all Americans for that matter – are in the dark about the balance of political power leading up to the midterm. There’s uncertainty, and stocks go down in the months before the midterm. But afterwards, the fog clears and investors feel more certain about the future. Interestingly, the election outcome doesn’t seem to matter. Whether the midterm election yields one-party domination or divided government, as we have now, stocks go up in the 12 months after the election. Investors apparently favor certainty over political philosophy. And there’s another – and somewhat related – observation about how the election cycle affects the markets, and it’s this: the third year of a presidential administration is the best year for stocks. On average, stocks go up nearly 14 percent in the third year of a presidential administration. In years one, two and four, they go up in the 4-6 percent range, on average, with year two – the midterm year – being the worst. Indeed, the second year of the Trump administration was a bad one for stocks. But now that we’re in the third year, we must ask: how are stocks faring in 2019? Very well, at least so far. The Dow is up 18 percent year to date. The S&P 500 and Nasdaq are even better: up 23 percent and 27 percent, respectively. The Valley 50 stocks are up 28 percent. Of course, the year isn’t finished. The theory is that in the first and second year of an administration, the President and Congress are focused on passing his agenda without particular concern about any effects on the economy. But in the third year, the President re-enters campaign mode and works to boost the economy. However, this third-year phenomenon does not have a 19-for-19 record. The third years of the Obama administration, for example, were not good years for the stock markets. Still, the third year’s the charm most of the time. But alas, good things must come to an end. The fourth year of a presidential administration generally is not nearly as good, and that’s what is coming up. Hey, maybe we can root for an NFC victory in the Super Bowl in January. I’m not superstitious or anything, but I’ll cross my fingers just in case. • • • We hear a lot about how businesses are having trouble thriving in California. You’d think most of them are shrinking. That’s why it is reassuring to scan the list of Fastest Growing Private Companies in this issue. You’ll see local companies not only growing, but growing by triple digits in some cases. And while it’s a feat to get on our list even for one year, several local companies have been on the list multiple years. Imagine growing quickly not only for one or two years, but for three or four or more years straight. They’re clearly not having trouble thriving. To be sure, it is unusually difficult to operate a business in California, and I don’t intend to minimize the challenges. But it is heartening to be reminded that success is quite possible here. In fact, it’s all around us. Just look at the list and you’ll see.