Today is Election Day – a day when your vote can help shape the landscape of American politics for the next two years. It also happens to be a day that bear markets tend to die.
Seriously. Forget the Fed and inflation. Forget a recession and all those Big Tech layoffs. As it turns out, politics have a tendency to trump all of that.
Did you know that since World War II, stocks have never sold off in the year following a midterm election?
We’ve had 20 midterm elections since World War II. Every time, stocks rallied over the following year.
Stocks have rallied after midterm elections 100% of the time. See for yourself in the data chart below.
We’re not talking small gains here, either.
Sure, there were some “weak” years. After the 1946, 1986, 2006, 2010, and 2014 midterm elections, stocks rose “only” about 5% over the next year.
But in most years, the gains were huge. We’re talking 15%, 20% and 25%-plus rallies in under a year! On average, stocks rally nearly 15% in the year following midterms, with zero instances of a negative return.
Over 70 years of market history says midterm elections are always bullish for stocks. Are you willing to bet against that?
I didn’t think so. Neither are professional investors. Why else do you think stocks have actually rallied in November, despite the Fed trying to quell the market with last week’s super-hawkish rhetoric?
I mean, look at the Dow Jones, folks. Everyone’s talking about a bear market, but the U.S. stock market benchmark index is now just 12% from all-time highs.
What bear market?
News flash: It’s over. And what comes next will be one of the biggest stock market rallies we’ve ever seen in 2023.
Why This Midterm Election Could Be Explosive
This isn’t a normal year for the stock market. The S&P 500 is down 16% year-to-date.
Therefore, we can’t really compare the 2022 stock market to, say, 2018, when stocks were soaring into the midterms. Instead, we should compare 2022 to other years when stocks were crashing into the midterms.
Zooming in on that data, it becomes even clearer why a massive stock market breakout is brewing.
Since World War II, there have been six instances when stocks were down more than 10% year-to-date heading into the midterms: 2002, 1990, 1974, 1970, 1966, and 1962. Each time, stocks rallied more than 10% in the 12 months after elections, with an average return of 18%.
In other words, stocks always rally after the midterms. And the rally tends to be even bigger when stocks are dropping going into them, like they are in 2022.
But it gets even better…
Typically, the bigger the selloff into the midterms, the bigger the rally, with the quantitative correlation averaging out to nearly a perfect 1:1. Therefore, with stocks down 16% year-to-date, it seems fair to say that the market will rally 16%-plus over the next year.
Of course, history is no perfect indicator of the future. But it is a good guide. And this guide of stocks always rallying after the midterms – and especially so after selling off into the midterms – is very bullish.
The Final Word
Off the top of my head, I can name three 100%-accurate technical indicators that are all suggesting stocks soar over the next year.
You have the 50% Fibonacci retracement (where stocks retook half of their bear market losses in the summer rally, a phenomenon that only happens when bear markets end).
You have the 90% breadth indicator (where 90% of stocks burst above their 50-day moving averages, a phenomenon that always predicts big gains over the next year).
And now you have the midterm elections (where stocks always rally in the year after).
We try not to look at the market with rose-colored glasses. We always try to analyze the data, and listen to what it’s saying.
But right now, folks, the data is screaming that stocks will rally in a major way over the next 12 months.
And the time to make money from this big breakout is now.
You have to remember: The market is a discounting mechanism. It doesn’t sit around and wait for inflation to fall, or the Fed to pivot, or earnings to improve to send stocks higher. It rallies before all those things happen.
All of those things are going to happen in 2023. Therefore, it only makes sense that the rally gets started here in late 2022.
It’s time to put yourself in position to capitalize on what I think will be a record-setting year for stocks next year.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.