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In One Chart: Midterm elections may not provide typical boost for U.S. stocks, Deutsche Bank warns, pointing to ‘real jaw dropper’ in this chart on recessions in presidential cycles

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The U.S. stock market tends to rise in the 12 months following midterm elections, but that might not be the case this time, according to Jim Reid, head of thematic research at Deutsche Bank.

In an emailed note Wednesday, Reid highlighted a chart showing the percentage of time in each quarter since 1949 that the U.S. economy has been in recession during the four-year presidential cycle. For example, during the first quarter of a term’s first year, the U.S. has seen a recession “just over” 15% of the time in the past 73 years, he said. 

“The real jaw dropper,” said Reid, “is that over this period a recession has not started in year 3 of the election cycle.” 

DEUTSCHE BANK RESEARCH

While “legacy recessions” have ended in the first quarter of year three of a presidential cycle, the chart shows a “stunning zero percent” for the other quarters during the third year, according to his note.

Meanwhile, investors have worried that a recession may be looming, potentially next year, as the Federal Reserve has rapidly hiked interest rates in an effort to cool the economy and curb high inflation. U.S. stocks have tumbled into a bear market in 2022 amid fears over the Fed aggressively tightening its monetary policy.

Read:S&P 500 earnings estimates for 2023 take ‘complete U-turn’ as recession risks loom, according to BofA

“Given that equities tend to bottom on average mid-way through a recession,” history would suggest that year three of a presidential cycle “has always had a clear run in a way no other year has,” said Reid. “Midterms have typically been a positive catalyst for the S&P 500 with equities always higher 12 months on over the last 19 mid-term cycles.”

But he expressed doubt over whether this trend might continue this time around, saying the first year of President Joe Biden’s administration “saw the culmination of the largest stimulus package seen in history with no bullets left to fire now.”

U.S. stocks opened lower Wednesday, as the battle to control Congress remained too close to call after midterm elections held Tuesday. On Wednesday morning, voters’ support for Democrats appeared to be dashing Republican hopes for a strong “red wave“.

The Dow Jones Industrial Average
DJIA,
-1.87%

was down 1.7% Wednesday afternoon, while the S&P 500
SPX,
-2.00%

fell 1.8% and the Nasdaq Composite dropped 2.3%, according to FactSet data, at last check.

Read: Own a muni ETF? Here’s what midterm elections mean for the municipal bond market, according to this investment team

“What is clear at this hour though is that neither major party is running away with the election in a ‘wave’ and it appears that Republicans are still on track to achieve a majority in the House of Representatives, a combo that should put a pin in any new fiscal stimulus for the next few years,” Reid said, in a separate Deutsche Bank research note Wednesday morning.

Reid wrote in his note on the chart that despite midterms being the typical “positive catalyst” for stocks, “we’ve also recently said that we think markets will be lower next year and that the usual midterm pattern ultimately won’t repeat.”

The S&P 500 is down around 21% so far this year based on Wednesday afternoon trading, according to FactSet data, at last check. 

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