Biggest winner in November vote? Stocks, most likely

If history is any indication, the financial markets are likely to rally following the Nov. 2 elections. According to a study of midterm elections dating back to 1922, the median gain of the Dow Jones Industrial Average over the 90 trading days following midterms was 8.5%. This compares with a 3.6% median gain during the comparable November to mid-March periods in non-election years, according to Brian Gendreau, market strategist with Financial Network Investment Corp. Mr. Gendreau, who is also a professor of finance at the University of Florida, said the market also tends to rally leading up to midterm elections for the simple reason that Wall Street most appreciates a balance of power in Washington — and midterm elections almost always result in a loss of seats in Congress by the party of the president. Mr. Gendreau disputes the popular argument that Wall Street rallies after midterm elections because it anticipates a period of gridlock in which Washington has a difficult time passing new legislation. “The market views a more even balance of power to mean that compromise is more likely,” he said. The polling data for the upcoming election, which show the Democrats at risk of losing both houses of Congress, help to explain the strong stock market activity over the past several weeks, Mr. Gendreau said. But even as modern polling and forecasting data can take much of the surprise out of major elections, the certainty of the end result tends to give investors that extra boost to drive stocks higher, he explained. For a historical perspective, consider this: Since 1942, the party of the president has lost an average of 28 seats in the House of Representatives and four seats in the Senate during midterm elections. There have only been two midterm elections since 1942 when the president's party didn't lose seats in Congress. In 1998, when Bill Clinton was president, the Democrats gained five seats in the House. And in 2002, when George W. Bush was president, the Republicans gained eight seats in the House and two seats in the Senate. Interestingly, a post-election rally tends to lead the market into what is traditionally a good year for stocks — the third year of a presidential term. In a separate study, analyzing the stock market's performance from 1871 through 2005, Mr. Gendreau found that the market is strongest during a president's third year. The average return of the Dow industrials was 10.1% during the third year of a president's term, followed by 7.5% during the fourth, 3% during the first and 2.7% during the second. The disparities are even more substantial when calculating performance after World War II. Over that period, the Dow industrials gained an average of 17.1% during the third year of a president's term, 9.9% during the fourth, 5.5% during the first and 3.7% during the second. E-mail Jeff Benjamin at jbenjamin@investmentnews.com.