Historically, mid-term elections have been able to send the Dow plummeting — but these bottoms never last long. Since 1913, the Dow has fallen during the mid-term election year, with an average decline of 20.4% from the election year highs. In recent years, the Dow has been rising higher and higher, and many analysts are worried that there could be a tipping point on the horizon.
According to the Almanac, the Dow generally falls on average 0.7% in May during the mid-term years. And that doesn’t mean that Mays outside of the mid-term elections are good for investors; non-election years see an overall loss of 0.02%. Overall, it’s believed that the mid-terms in whole could drop the Dow by up to 16%. This could mean some extraordinary losses for investors who aren’t paying attention to the direction of the market.
Why do the mid-term elections so significantly impact the Dow? Mid-term elections mean a lot for business, from whether certain regulations will be passed to how taxes will be calculated moving forward. When elections occur, timid investors may react preemptively to the change in political structure. Companies may find themselves being sharply undervalued in the wake of mid-term elections, as it may be anticipated that they will be facing a harsher market.
Nevertheless, the Dow generally recovers very quickly following the decline. This can create some substantial opportunities for investors who are able to appropriately time the market, with the caveat that they may be seeing a larger market correction than they believe. Additionally, due to the nature of the political changes that could be occurring, there are certain industries that may be more vulnerable than others, and may be impacted in a more long-lasting fashion.
May has always been a fairly bad month for the Dow, and a mid-term election year historically makes it worse. Investors may be hoping that May will be a positive month due to April, but the data suggests otherwise. Investors should be cautious about making any substantial moves during the month of May. In fact, investors may want to avoid making any large moves until October.
May through October has always been a seasonally weak period. That being said, it has become less true in recent years than it was in prior years. In recent years, May has still been a fairly strong month, even though it has underperformed other months of the year. This is a sharp contrast to the past, in which May was a nearly universally poor time to invest.
At 26,616.71, the Dow Jones Industrial Average set a record on January 26, 2018. Since then, it’s been volatile, falling down to 23,860.46 on February 8th. The past five years have seen the Dow trending steadily upwards, with minor course corrections. Many believe that the market right now is over-inflated and in a bubble — and that a crash is imminent.
If this is true, then the mid-term elections could simply spark the spiral of prices that analysts are waiting for. A recovery may not be possible if the Dow is truly over-valued as it is, though many argue that it isn’t, and that the steady increases are a direct result of economic strength.
What does this all mean for investors?
Investing just before the mid-term elections may become risky… while investing just after the mid-term elections could lead to premium stocks at a discount. Mid-term elections often lead to a bottom out followed by a fast rally, which can also cause a fast development of wealth. On an economic scale, it may also cause churn and reinvigorate (or disrupt) many markets. On the other hand, if analysts are right and the market is headed towards a violent correction regardless, the mid-term election may simply hasten it.
Regards,
Ethan Warrick
Editor
Wealth Authority
