Yahoo Finanza Why the stock market may skip the usual midterm election rally
History shows the stock market loves the period after the midterm elections — but that might not be the case in the wake of this year's Nov. 8 election.
"A lot of things will drive the stock market,” Gargi Chaudhuri, head of iShares investment strategy at BlackRock Americas, said on Yahoo Finance Live. "I don't want to base it entirely upon the Fed and elections only. ... But all else equal, if you are just giving me a hawkish Fed and a divided government, I think it is just going to be really hard for the equity market to make new highs or to get back to levels that we had seen for perhaps in the second quarter of this year with that framework."
The S&P 500 index (^GSPC) has historically outperformed in the 12-month period after a midterm election with an average return of 16.3%, according to data from U.S. Bank. For perspective, the last time the S&P 500 produced negative returns in the year following a midterm election was in 1939.
The backdrop for stocks this time around remains rocky, to say the least.
"I think it is going to be very difficult for the stock market to have the rallies that we saw in the first two days of October," Chaudhuri stated.
The Federal Reserve continues on its mission to stomp out inflation by forcefully jacking up interest rates. Such a hawkish policy stance from the Fed has rippled across an array of asset markets, from the surging U.S. dollar to rising mortgage rates that are nearing 7%.
Despite impressive rallies in the first two trading days of October, the Dow Jones Industrial Average (^DJI), S&P 500, and Nasdaq Composite (^IXIC) remain mired in double-digit percentage declines for the year. Shares of big-name tech companies such as Meta (META) and Netflix (NFLX) are each down close to 60% on the year as investors take profits from higher-risk stocks.
Oil prices have also started to spike again, particularly after OPEC+ announced it would cut output. That has reignited a major headwind to corporate profits.
"I think we really need to see a fundamental shift in the earnings picture where earnings growth is very healthy across all sectors," Chaudhuri said, "and I just don't see how that happens when we have an economy that is slowing down because the Fed wants it to."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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