Investment analysts, academic researchers, and political scientists have actively investigated potential factors and relationships impacting the economic landscape, market performance, and political success. Most notably, Austrian-born Harvard professor, Joseph Schumpeter, studied three interrelated macro cycles: the Kondratieff, Juglar and Kitchin (Figure 1).

Schumpeter's Adapted Cycle

The latter is a short business cycle of about 40-months which has now become associated with the U.S. presidential election cycle, and, as a result, is taken to have a span of 4-years. Post-midterm election historically leads to the stock market outperforming in the 12-months period afterwards, with an average S&P500 return of 16.3%, with variations in either a bull or bear market cycle (Figure 2). The bear-case scenario is most likely for the current market setup, offering.

Bad times overwhelm the midterm of 1939

Jeremy Grantham offers a subtle explanation that investors unconsciously believe that if anything were to happen to derail the stock market in a run-up to an election, the administration and perhaps also Federal Reserve would step in with appropriate measures. Another factor might be policy uncertainty, which often resolves after knowing which political party will hold majorities in Congress.

Midterm Variations in Bull-BearMarket headwinds during the 1960s and 1970s

However, the most important factor is likely the health of the economy and markets. A case in point, is the last time S&P500 produced negative returns during the 12-months after a midterm election was 1939 – a time of tremendous economic contraction and uncertainty as the US battled the Great Depression and World War II began in Europe (Figure 3 & 4). This also explains why negative pre-midterm market returns dominated the 1960s and 1970s, pulling down the overall pre-midterm average. The period of President Lyndon Johnson and Jimmy Carter were marked by stagflation, elevated policy uncertainty and geopolitical tension.

Meanwhile, the 2022 midterm pattern could trigger a relief-rally (Figure 5), for a very different reason: gridlock! With polls showing the Democrats could suffer from the so-called “midterm curse” whereby incumbent parties are fated to lose seats, either in the US House or the Senate. This would stall any major legislation and freeze the splurge in spending, a likely positive in the short-term, leading to greater uncertainty later.

Midterm Pattern and 2022

Additionally, recall I had highlighted the combination of monetary and fiscal policy that typically bottoms before midterms and accelerates through the pre-election year. The NDR index of both policy factors is near a record low and may serve as a contrarian bullish setup (Figure 5). Perhaps a Fed pause or China re-opening finally ahead, or an unknown white swan scenario?

Policy Index Near Record Low

Certainly, any welcome change to inflation headwinds, or government spend and taxes would help improve voter sentiment (Figure 5 & 6).

Inflation and government spending

Our cycle model (Figure 7) signals a brief upsurge into the new-year of 2023, followed by a rollover, as macro headwinds weigh in!

Presidential Cycle Model

What do you think about “Politics & Portfolios: How the Midterms will impact?” Share your insights and questions on my FSC email

Ron William, CFTe Bio

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Ron William, CFTe, is a market strategist and educator/mentor with more than 20 years of experience working for leading macro research and institutional firms, producing tactical research and trading strategies. He specializes in global, multi-asset, top-down framework, grounded in behavioural technical analysis, driven by cycles based on the "Roadmap" signature model of veteran market technician Robin Griffiths, published in his book Mapping the Markets.”

Ron also applies a "market & mind" approach at IntensiChi, using the latest techniques in behavioral-risk models and neuroscience sourced from expert groups. He further supplements with mentoring/coaching, trained by the International Coaching Federation (ICF), and teaches a regulatory approved masterclass in Applied Behavioral Science, with investment, private banks and CFA Societies.

Ron's primary work, as part of his current institutional market advisory firm (RWA), acquired global industry recognition as winner of “Best FX Research” in 2020. Financial media programs and industry publications regularly feature his market insights, including “Is the big cycle about to turn?”, predicting the 2020 crash and alerting the “Minsky paradigm” of 2020 H2-2022.

Driven by high-integrity education, Ron serves as part of the education committee of the International Federation of Technical Analysts (IFTA), Development Director at the Foundation of the Study of Cycles (FSC), Head of SAMT’s Geneva Chapter, and an honorary member of ESTA. He is also a visiting lecturer at universities, active guest speaker for the CFA, CAIA and CISI, and senior teacher at colleges offering an accredited diploma in trading and investing.