A Strong Stock-Market Rally Could Be Coming Later This Year

Midterm Elections in Times of War

Of course, each midterm year is unique, and this year looks to be no different. Could the stock-market impact of Russia's invasion of Ukraine overshadow stocks' post-midterm strength?

The academics sought to answer this question in an unpublished follow-up study. They began by focusing on midterm election years in the previous century, during which there were large global war conflicts. Because there were luckily a limited number of such years, any findings must be considered speculative. Nonetheless, they claim that the stock market's average return in such years was "remarkably consistent" with the trend they discovered in previous midterm years.

This conclusion shows, at the very least, that the Ukrainian war isn't a cause to expect post-midterm strength to be less prominent this year. And there might be a reason to anticipate it even more confidently because the controversy has slowed the market considerably more than typical before the midterm elections.

Midterm Exams During Rate-Raise Cycles

This midterm election year also coincides with the Federal Reserve's rate-hike cycle, which seems to be on track to run until the end of the year and into 2023. Because stock investors often respond unfavorably to increasing interest rates, might this cycle be one of the reasons why post-midterm gains do not materialize this year?

This was also investigated by Chan and Marsh. As with midterm elections during warfare, there have been very few midterm election years throughout rate-hike cycles. As a result, any findings must, once again, be considered speculative. Nonetheless, they discovered that, on average, after the elections, interest rates witnessed a "fairly durable drop."

What's the bottom line? If this were a "regular" year, the next 12 months would be the only period between now and 2025 when you should bet on the Halloween Indicator's wintertime strength. And while 2022 is far from a regular year, two of its most evident anomalies do not appear to be impediments to that wager.

If you're tempted to take advantage of a probable post-midterm surge, wait until the election results are in before putting your bets. That would probably be the morning of Nov. 9, the Wednesday after Election Day. However, if the results are so close that control of the House or Senate isn't yet assured, wait until it is.