Stocks Fell After the Midterms. History Says the Next 12 Months Could Be Very Different

The recent U.S. midterm elections caused a decline in stock markets, with all three major indexes dropping in the aftermath. While some investors might be concerned about the potential bursting of the artificial intelligence (AI) bubble and a prolonged downturn in equities, history suggests a different outcome. Let's examine what typically transpires in the 12 months following U.S. midterm elections.

It's not unusual for elections to impact equity markets, at least in the short term, as the results can heighten uncertainty, which investors dislike. This was the case during the recent elections. However, the subsequent 12 months often bring positive results for equities. Considering past trends, the S&P 500 has delivered average returns of about 15% in the 12 months following the midterms since 1950.

While past performance doesn't guarantee future results, there's a valuable lesson for investors to keep in mind: business performance and economic growth are far more crucial to stock market returns than election outcomes. Government regulations may affect both, but in the long run, equities have thrived amidst changing administrations, legal and regulatory shifts, and high inflation.

So, there's no need for excessive worry about the recent post-election decline. To navigate the current market environment, the most crucial step is to remain composed. Panic selling is not the solution. Sticking with strong stocks regardless of market fluctuations is an effective way to generate above-average returns over the long term.

The recent volatility may even present an opportunity to benefit from others' inability to stay calm. Here are three excellent investment options to consider:

1. The Vanguard S&P 500 ETF (VOO -0.94%): This index fund mirrors the S&P 500's performance with minimal fees, charging only 0.03% annually. With a focus on long-term growth, it's an ideal choice for investors seeking broad exposure to the U.S. stock market.

2. Netflix (NFLX -2.02%): Despite recent challenges, Netflix's stock is trading at near-10-year lows, making it an attractive investment opportunity. The company is investing in original content and exploring new monetization avenues, such as sports streaming, which could drive future growth.

3. Johnson & Johnson (JNJ -0.38%): As a diversified healthcare giant with a strong pipeline of new products and a robust dividend program, Johnson & Johnson is well-positioned to weather economic challenges. Its consistent revenue, earnings, and dividend increases make it a solid choice for long-term investors looking to navigate market volatility.