Personal Wealth Management / Video Commentary

Fisher Investments’ Founder, Ken Fisher, Explains the Midterm Miracle

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher shares his thoughts on the market impact of US midterm elections. Ken observes how US stock returns in the fourth quarter of midterm election years have been positive over 80% of the time and have returned an average of around 6% since 1926—a dynamic underappreciated by many investors (1). He believes this phenomenon is caused by increased gridlock—a natural consequence of most midterm elections which can help prevent major legislation from passing. Ken says markets respond positively to political gridlock because a lack of meaningful legislation allows investors and businesses to take a longer, less defensive view.

Ken also discusses why this matters for global investors, pointing to high correlation coefficients between US and developed non-US stock markets. Ken believes the positive impact on markets could be better than usual over the coming year because, with a few exceptions, the stage is set for countries across Western Europe and developed Asia to see increased gridlock similar to the US. He thinks this will be a positive surprise most investors don’t expect—a bullish sign for markets.

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A man appears on the screen Wearing A navy suit, sitting in a office with a view of a thick forest behind him from the window.

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Ken Fisher: Midterm election years in America have a very high consistency—an anomalously high consistency—of positive returns.

Going back to the history of the S&P 500, of the fourth quarter midterm election year returns are positive 6% on average with well over 80 consistency. And that doesn't mean necessarily what happens this time, but it says there's a force there.

And the force that's there comes from midterm elections creating a trend toward relative or absolute gridlock—that's happened in all but a couple of elections ever. The consistency there is stunning. It then stops big, major legislation. The effect ripples on into the third year of the president's term, and with huge consistency. Again 80-plus percent—high eighties.

And the reality of that is that it's easy to see and demonstrate in American politics because you have this regular every other year cycle. That people don't see it says they don't want to see it. The data are clear; the cause is clear. But it always surprises people. When the fourth quarter comes, and markets tend to become strong after having been weaker in the midterm year as politicians yell at each other and say all the stupid stuff they've been saying this year, it surprises people. Things quiet down, legislation quiets down, political riskNO aversion falls, and markets respond positively to that. Investors can take a longer view, businesses can take a longer capex view for a couple of years. All of that's positive.

What people also don't get however, now, where this is particularly likely to happen, because I think as you know it's very likely that the Republicans take the House of Representatives in the midterm creating absolute gridlock—doesn't take much in this particular election for that to happen.

The other side of the coin that people don't think about is that in the rest of the world, in country after country, we've been building evermore gridlock. Evermore gridlock where there's less and less one-party, or in parliamentary systems, parallel ideology, parties being able to gain control and pass major legislation.

And, while I can't promise you this, I think you will see that effect not just in America. It's clear that the correlation coefficient between the US world and particularly the developed non-US world is very high.

Stock market correlation coefficients

there are very high. Depending on where you are and what the sectoral makeup of the countries are in the 80s. That's a lot of consistency moving together as opposed to wiggling apart.

And then secondarily, that they're all doing a sort of similar thing, at about the same time, says that effect can ripple even stronger than it normally does. Where the midterm election effect typically correlates overseas, this year you've got the backdrop for that to happen in country after country in Western Europe, but also in countries across major developed nations in Asia with a few exceptions.

And so, I think this trend toward gridlock being global at a time when gridlocks to be created on a hardcore basis in America, most likely, is a positive effect that I don't think most people actually anticipate and will be a surprise. Positive surprises are bullish, and you should be thinking about that as the fourth quarter rolls into position.

Thank you very much for listening to me.

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Ken Fisher: Subscribe to the Fisher investment YouTube channel. If you like what you've seen, click the bell to be notified as soon as we publish new videos.

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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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