Opinion: Midterm elections are over. Good news for stocks?

Joe Shearrer

If there is one thing investors have learned over the last several years, it’s that the stock market rarely runs short on things to worry about. Elections, interest rates, inflation, tariffs, geopolitical conflict and economic uncertainty seem to provide a never-ending stream of headlines. With elections now behind us, investors are once again left asking an important question: What happens next?

The initial market reaction was somewhat telling. While uncertainty surrounding the election results initially pressured futures, markets recovered as investors began considering the possibility that divided government could limit sweeping policy changes. Historically, investors have often viewed political gridlock as a positive because it can make significant legislative changes more difficult.

According to research from J.P. Morgan Asset Management, the S&P 500 has delivered a positive return in the 12 months following every midterm election dating back to 1950. The average gain during those periods has been approximately 15%. That is an impressive historical trend, although it certainly does not guarantee a similar outcome this time around. Every election cycle unfolds against a different economic backdrop, and the market ultimately responds to much more than who controls Washington.

So what should investors be watching now?
First, corporate earnings. Over the long term, stock prices are driven largely by the ability of companies to generate profits and grow those profits over time. Tax policy, regulation and government spending can influence corporate performance, but ultimately, businesses still need to produce earnings to justify their valuations.

Second, interest rates and inflation remain critical. The Federal Reserve’s decisions will likely have a much greater influence on the market than the political headlines coming out of Washington.

Finally, investors should pay attention to policy changes that could affect specific industries. Artificial intelligence regulation, energy policy, corporate taxation and government spending could create. However, the ability of Congress to implement significant changes will be limited by the divided political environment.

For investors, this brings us back to a familiar principle: Don’t confuse political uncertainty with investment risk. Investors may feel more comfortable owning stocks when their preferred political party is in control and more inclined to move to cash when the opposing party wins. Unfortunately, that approach can be costly.

The market does not operate on presidential and midterm election cycles. It operates on business cycles, earnings growth, economic conditions, interest rates and investor expectations. Rather than trying to predict how Washington will influence the next market move, investors should use this opportunity to evaluate what they actually own. Is the portfolio appropriately diversified? Does the level of risk align with their financial goals and time horizon? Are they positioned to withstand market volatility without being forced to make emotional decisions?

The election is over, but the headlines won’t stop. There will always be another political development, economic report or geopolitical event capable of moving markets. The challenge isn’t predicting what happens next in Washington. It’s making sure your financial plan and portfolio are prepared for whatever happens next in the markets.

Invest accordingly, not politically.

Joe Shearrer is a vice president and wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at joe@ferventwm.com.