History Suggests Bull Run

Regardless of which party controls Congress, midterm elections have proven to result in market gains.
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While pundits debate the impact of Republican or Democratic control of Congress, the market doesn't care who wins or loses the elections -- at least according to historical patterns.

According to Joseph Quinlan, chief market strategist of global wealth and investment management at Bank of America, history suggests that no matter which way Tuesday's midterm elections go, they should be bullish for the stock market.

"After analyzing all the data back to 1946, we found that following midterm U.S. elections, the

S&P

posted average one-month, three-month and six-month total returns of 3.4%, 10.4% and 18% respectively," Quinlan says. "That's not bad, but one-year returns were even better -- 23.1%."

While Quinlan says that he's not expecting a repeat of those double-digit post-election returns, he does expect the market to "grind higher" in coming months.

Jim Stack, market historian and author of the InvestTech Research newsletter, says post-midterm election periods are typically bullish for investors. He has researched market performance during the four-year election cycle, going back to the early 1950s.

Stack divided the cycle into two periods: from the day of the presidential election to midyear (July 1) of the midterm election year, and from the middle of the midterm election year to the next presidential election. The results are startling.

Stack says the individual who invested $10,000 in the

S&P 500

at the middle of the year of a midterm election and then sold at the presidential election, saw his account jump to $272,987 by following that strategy over the past 56 years.

The investor who bought the day

after

a presidential election year and sold at midterm, over those same cycles, would end up with a portfolio worth only $9,345.

History may also prove a guide for trading decisions during the week surrounding the election.

The Stock Trader's Almanac

notes that there is a bullish trend to the stock market in the five days before and three days after mid-term elections.

Since 1934, that eight-day trading period has produced an average gain of 2.9%, roughly equivalent to 40 points on the

Dow Jones Industrial Average

per day at current levels. Though the Dow lost ground last week, Monday's rally may help keep this trend intact.

Of course, this trend could be in question should the Democrats gain complete control over Congress. The

Almanac

points out there was only one losing midterm period for stocks: 1994, when the Republicans gained control over the House and Senate during a Democratic presidential administration.

But the theory could still hold up should the Democrats gain control of just the House of Representatives, as many pundits are predicting. According to the

Almanac

, there were nine occasions when the President's party had a double-digit loss in House seats. The average market gain during the eight-day trading period was 2.3% during those years.

But the status quo is even better for the market, historically. The eight years when there were no seat losses, or losses in single digits, showed a gain of 3.4%.

Of course, if history were a perfect predictor of the future, there would be no risk in investing. So if you're looking to history to guide you, remember that hindsight is always 20:20 -- especially in the stock market. And that's The Savage Truth.

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Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,

The Savage Number: How Much Money Do You Need?

in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.