Relationship between US midterm elections and Japanese equities

Research evidence excerpt

Relationship between US midterm elections and Japanese equities

Strong equity performance after midterm

elections

The US midterm elections will be held on 3 November. We believe their impact on equity

markets will gradually increase. Accordingly, we take an early look at the relationship

between midterm elections and equity markets.

In general, equity markets tend to deliver weaker performance in years when presidential

or midterm elections are held (Exhibit 1). One reason may be that political uncertainty

tends to be more prominent in markets than in other years.

Midterm elections in particular serve as a referendum on the incumbent administration.

In every midterm election held over the past 20 years, control of either the Senate or the

House of Representatives changed hands (Exhibit 2). In particular, the ruling party lost

seats in every House election where all seats were contested. Uncertainty over the

political environment is likely one factor constraining equity market performance.

However, this does not necessarily lead to a decline in share prices. Since 1982, around

half of all midterm election years have generated positive returns. Average year-to-date

performance tends to correct or stagnate from around August, during the holiday

season, through the pre-election period, but begins to improve from about 20 trading

days before election day (early October) (Exhibit 3). We believe this reflects investors

gaining greater confidence in election outcomes as the election day approaches,

reducing political uncertainty. Although markets often correct or stagnate before

elections, excessive pessimism toward midterm elections looks unwarranted. Notably,

this improvement in performance tends to continue for some time after the election

(Exhibit 4).