The Midterm Election Effect on Us Stock Returns: Some Practical Considerations for Investors
30 Pages Posted: 28 Sep 2022 Last revised: 20 Oct 2022
Date Written: October 19, 2022
Abstract
The midterm election effect is one of the most persistent regularities related to US politics reported in empirical finance, but it has also been one of the least examined. We explore practical implications for investors who would like to benefit from the effect. First, we draw lessons from an analysis of 49 industry portfolios, using monthly excess and risk-adjusted returns for the period 1926-2022. Contrary to much commentary in the professional media and prior literature, higher returns around midterm elections all but disappear after returns are adjusted for risk. Second, we find that midterm elections are predominantly associated with the market factor and thus, higher returns appear to merely compensate investors for bearing risk.
Keywords: Midterm election, Midterm election effect, Political uncertainty, Fama-French 5 factors model
JEL Classification: G11, G12, G14, P48
Suggested Citation: Suggested Citation