Why Stocks Are Poised for 12-Month Rally

An oft-repeated maxim is that the stock market hates uncertainty, and a major cause for uncertainty has been resolved, given that the U.S. midterm congressional elections are now behind us. If history is a guide, investors should expect the S&P 500 Index (SPX) to advance over the next 12 months, per analysis by Yardeni Research Inc., as cited by Barron's. In Tuesday's midterm vote, returns indicate that the Democrats won a majority in the House while the Republicans held their majority in the Senate. But the Yardeni Reseach study and other studies show that stocks have risen in the 12 months after every midterm election from 1954 through 2014, a span of six decades, without exception, and regardless of which party posted gains. This has happened regardless of the immediate short-term reaction of the market after the election. As noted above, the market has a long history of reacting negatively to uncertainty, and positively to the resolution of uncertainty. It also has a tendency to react negatively in the short term when expectations are confounded. A prime recent example related to elections was the surprise win of Donald Trump in the 2016 U.S. presidential election. Although Trump was widely viewed as considerably more business-friendly than opponent Hillary Clinton, the market nosedived in overnight trading after his unexpected win became apparent, before reversing course within hours and commencing a long rally that extended into January 2018. Stock market gains so far since Trump's election are detailed in the table below.