Chart of the Week

As November draws near, election-related uncertainty could become a more meaningful factor for equity markets. Equity performance has historically been choppier in the months leading up to midterm elections, as investor uncertainty has weighed on risk appetite.

The chart above shows that since 1978 declines in the S&P 500 Index during midterm election years have been followed by positive returns one year later. Additionally, even if investors do not time the bottom of the correction, the S&P 500 Index has delivered an average return of 5.5% in the year leading up to a midterm election, versus 13.1% in the year after the election.

In our view, investors are better positioned to assess the policy landscape and refocus on fundamentals after the election occurs. Drawdowns tied to midterm election uncertainty have historically been moments to consider adding to equity exposure than to retreat from it.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

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