Midterms have been kind to the S&P 500. SocGen says don't get cozy

What happened

Societe Generale found the S&P 500 averaged a 15.7% gain in the six months after U.S. midterm elections held under a Republican president and divided government, with positive returns in all nine cases. The firm cautioned that this history may be more statistical than signal.

Confirmed

Global impact / market context

Investors hoping for a repeat face a key caveat: divided government did not stop an 8.5% year-end decline in 2018, when Federal Reserve tightening, which means the central bank raising interest rates, and quantitative tightening, which means shrinking its bond holdings, drove a drawdown of nearly 20%.

Analyst inference

SG's economists said early voting was reinforcing a Democratic signal, with its model putting the probability of a Democratic sweep at 53%, so investors are weighing whether a political outcome would matter more than Fed policy for stock returns.

Analyst inference

What to watch

1. SG cautioned that midterm history may be more statistical than signal, given President Donald Trump's record use of executive orders, suggesting policy can shift without legislation from a divided government. Confirmed
2. Watch whether SG's model probability of a Democratic sweep at 53% shifts as early voting continues, since that outcome would differ from the Republican president and divided government scenario studied. Proposed
3. Fed tightening and quantitative tightening drove the nearly 20% drawdown in 2018 despite divided government, so monetary policy may matter more than election results for stock returns. Analyst inference

Evidence

• seekingalpha.com