Markets and Economy Midterm elections haven’t radically changed economic growth

Midterm election season is ramping up, with candidates from across the political spectrum claiming that their party will be best for the economy. But what does history tell us about markets and the economy under different configurations of government? Here are four things investors need to know.

1. Economic growth has been similar under single-party rule and divided governments

Investors are often concerned that elected officials will drastically change the economy, yet the composition of the US economy has remained fairly consistent for decades. Government expenditures, business investment, and consumption represent largely similar portions of gross domestic product (GDP) today as they did in 1956.¹

What about economic growth? As shown below, the median annualized quarterly percent change in US GDP has been remarkably similar during single-party and divided-government rule. (The outlier GDP growth quarters under divided government were the result of the shutdown and reopening of many segments of the US economy as a result of the COVID-19 pandemic.)

2. The stock market has historically risen the year after midterms, regardless of party

The stock market has posted positive returns in the calendar year following midterms for nearly 65 years, regardless of the election outcome.

3. Markets have performed well under single-party rule and different types of divided government

A common misconception states that markets prefer divided government. However, performance the year after the midterms has tended to be strong regardless of the election outcome. Historically, markets have performed well under single-party rule and different combinations of divided government.

4. Most investors have historically been better off staying fully invested

The market’s long-term advance has occurred across multiple administrations and combinations of government. As shown below, a hypothetical portfolio that stayed fully invested through both Democratic and Republican administrations has performed better over the long term than one invested only when one party was in power, or only during divided government.

The key takeaway? The more time investors have spent in the market — regardless of the party in the White House — the better. Don’t let election outcomes disrupt long-term investment plans.