A strong market rally could be just weeks away if the US mid-term elections can ease jittery investors

If this year’s US midterm election cycle is anything like last year’s, the stock market will make a major low right around Election Day in November.

That should give some hope to beleaguered investors whose stocks have suffered double-digit losses so far this year. A meaningful rally could be just weeks away.

I am referring to the historical stock market pattern of pre-interim weakness and intermediate-term strength. This pattern is illustrated in the chart below, which is based on the average July-December performance of the Dow Jones Industrial Average DJIA,
+1.19%
the last 17 midterm election years (since 1954).

Although the average date on this chart is in October, the actual record lows may come sooner or later. A lot depends on when the stock market starts anticipating the outcome of the intermediates and therefore discounts it. A good guess is that this year’s low will be later, given the uncertainty surrounding the election outcome — especially in the US Senate.

It is always possible that the pre-midterm low will be made before Election Day. It wouldn’t be inconsistent with the all-time record for this year’s low to be set the day after Labor Day, in fact. As of September 9, the S&P 500 SPX,
+1.53%
it was more than 4% higher than that low.

It’s worth noting how remarkable it is that any pattern emerges when stock market swings are averaged over several years. Although each year traces a unique path, the highs and lows usually cancel each other out, leaving the average to be a gradual upward trend. A pattern must be strong enough in the historical data to show a divergence as sharp as the one in the accompanying chart.

This pre- and post-intermediate-term pattern is so pronounced that it is the source of the famous seasonal pattern known as the “Halloween Index,” in which the stock market is strongest between October 31 and May 1 and weaker on others six months. of the year. However, remove the six months before and after the midterm elections, and the Halloween indicator disappears.

The underlying data is shown in the table below. The cell is marked with a single asterisk

refers to the current semester, while the cell marked with a double asterisk (**) corresponds to the semester starting at the end of October 2022.

Presidential cycle year since 1954

Dow Average Gain from Halloween to May 1st

Average Dow gain from May 1 to Halloween

1

6.4%

1.5%

2

4.7%

-0.2%*

3

15.1%**

1.1%

4

4.3%

0.5%

So if you’re tempted to bet on the Halloween index, your time is fast approaching. If you miss it, you won’t get another chance until the 2026 midterms.

Credit for discovering that the Halloween indicator is found in the months before and after the midterms goes to Terry Marsh, emeritus professor of economics at the University of California, Berkeley, and CEO of Quantal International, and Kam Fong Chan, senior lecturer in finance at the University of Queensland in Australia. Their research into this pattern appeared in July 2021 in the Journal of Financial Economics.

The likely source of the pattern, according to the researchers, is the uncertainty that exists before the midterm elections and the resolution of that uncertainty after the elections. They note that it does not seem to matter which party dominates Congress before the midterm elections and which party becomes the majority party afterward. The pattern exists, they believe, because the stock market craves certainty, even when the source of that certainty may not align with every investor’s political preferences. Mark Hulbert is a regular MarketWatch contributor. Its Hulbert Ratings tracks investment prospectuses that pay a flat fee to be reviewed. It can be reached at

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