Strong Midterm Years Weigh on Following Pre-Election Years
Midterm years are notoriously a rough year for markets as presidents push through their most disruptive policy initiatives and battle the opposition party to retain congressional seats. But the last three midterm years, 2006, 2010 and 2014 have been strong followed by troubled pre-election years. 2007 brought us the major top of the Financial Crisis with the S&P up 3.5%. 2011 suffered a mini-bear from April to October that shaved 19.4% off the S&P, which ended the year down a fraction -0.003%. Another mini-bear transpired in 2015 with the S&P losing 14.2% from May 2015 to February 2016. The S&P finished 2015 off -0.7% for the year.
From the chart below comparing 2018 to the previous three midterm years 2006, 2010 and 2014, it looks like we are setting up for above average midterm year market gains again followed by a weaker pre-election year prone to a bear market and a recession. Encircled in yellow, all four years suffered early-year declines in January/February. Looking forward from here the previous three midterm years had pullbacks that ended in July or August or September/October as was the case in 2014.
