Midterm Elections

Since 1950, the stock market has had an average gain of 18.6% in the 12-month periods following mid-term elections. In four of the last six midterm votes the one-year gain following exceeded the average: 24.9% in 1998, 21.7% in 1994, 25.7% in 1990 and 23.5% in 1982. The other two were also positive: 16.7% in 2002 and 6.2% in 1986.

Most of these years saw a fairly strong decline in the market prior to the election, something we haven't seen yet. They also began at a much lower P/E than today's. To see the 18.6% average one-year gain coming out of this year's election would require a lower market over the next five weeks along with dramatically lower interest rates in 2007. We think the Fed will be lowing rates next year but doubt it will be enough to produce an above-average gain in the market, especially in light of the record high profit margins we are seeing this year and a clearly slowing economy.

It is interesting to note that the poorest performing post-election year was 1986 - another year with a second term Republican president experiencing significantly lower approval ratings than seen earlier in the presidency.