Why US midterm elections could power the next stock market rally

The upcoming US midterm elections could be the catalyst for an anticipated stock market rally, despite the elections occurring every four years. This phenomenon, dubbed the "midterm miracle", has historically been a positive nine-month stretch for stocks, with the effects extending to other regions like Singapore. The pattern emerges from the possibility of political gridlock, as legislative power diminishes for the president during midterms, making it harder to pass significant legislation in the following two years.

Presidents often aim to pass their most controversial bills in the first two years of their term, fearing losses in the midterms. Such legislative uncertainty typically makes stocks less appealing, causing fluctuations in stock prices. However, following the midterm elections, the political environment often shifts to a quieter, less polarized atmosphere, which could prove more favorable for stocks.

Historical data shows that the S&P 500 has been positive in the fourth quarter and the subsequent two quarters of midterm years 84% and 88% of the time, respectively, with an average gain of 19.8% over a nine-month period. This positive trend has also been observed in global markets, with US and non-US stocks showing a correlation of 0.83 and Singapore stocks experiencing a 5.6% gain.

Despite the drumbeat of extreme campaign rhetoric, market performance is more likely to be influenced by the legislative landscape after the midterm elections and the extent of gridlock that results.