General / Expert Commentary

Fisher Investments' Founder, Ken Fisher, On How The Midterm Election Results May Impact Markets

Fisher Investments’ political commentary is intentionally non-partisan. We favor no politician nor any party, assessing developments solely for potential market impact.

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher explains how the US midterm election results will likely impact markets in coming months. Following the recent election, Republicans took control of the House and Democrats retained control of the Senate—delivering a gridlocked US government. Ken says this sets the stage for what he calls the “Midterm Miracle”, which has provided the most consistently positive 9 month period for US—and global—stocks in history.

According to Ken, starting in the 4th quarter of a midterm election year through the 2nd quarter of a President’s third year in office, US markets have been positive over 91% of the time. US markets were up nearly 20% on average over those 9-month periods. The last time a negative 9-month post-midterm period occurred in the US was in 1939, and Ken says the period has never been negative in European indexes. Ken believes a gridlocked environment lowers the risk of passing new sweeping and controversial legislation—creating a calming effect markets enjoy. Regardless of your personal feelings about the election results, Ken says the resulting gridlock is good for stocks moving forward.

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Ken Fisher: So, I get asked every few hours, right about now on November 15, what the outcome of the election is and what its impact on markets is.

Ken Fisher: And said simply, I think everybody knows what's gone on to date with the Senate and Republicans losing a seat that they may regain in Georgia, may not, with a runoff that's in December 6 or starting basically now and running through December 6.

Ken Fisher: The House of Representatives is one where the Republicans, as I speak, are one seat away from taking formal control of the House. There's currently four seats where the Republicans undecided, seats where the Republicans lead, and are in districts where most of the uncounted ballots are in Republican turf. And therefore, they'll certainly get over 218, may well get up to 221. There's a few more that could go either way, maybe they get a little higher than that, but they certainly take control of the House.

Ken Fisher: And what that means fundamentally is now you have the Senate controlled by the Democrats, Republicans will hold the House. That means that the only bills that can make it through both chambers and go to the President's desk are things that people pretty commonly agree upon, and there's not a whole lot of that. So, they can't be very controversial. They can't be too big, they can't be too scary. And this is what's called hardcore gridlock.

Ken Fisher: The President's party has the Senate and presidency and not the House. And gridlock is traditionally good for stocks. The three quarters, nine months, that begin with the beginning of October in a midterm election year, those nine months are the most consistently positive period in US stock market history—in fact, global stock market history—any way you slice it, every which way, good times, bad times. Could be a nine-month good run in an otherwise bad market, could be the beginning of a bull market, which is what I think happened in October. But I could be wrong about that. Regardless, I'm going to say it's the most consistently positive nine months.

Ken Fisher: That nine months has only been negative twice in the period we've had good, accurate stock market history going back to 1925, and the last time was as World War II started.

Ken Fisher: Average annual returns over that nine-month period are not quite 20%--19.5%. Not only is that true, in the history of major European stock indexes it's never been negative. There's a high correlation between US and foreign, and most Europeans pay a lot of attention to US politics. The reason that this thing works is pretty simple, not well understood, and almost no one believes it. But that because almost no one believes it, that's part of why it works.

Ken Fisher: Intuitively you know in your bones, and a couple of behavioral psychologists named Richard Thaler and Shlomo Bernartzi proved this decades ago, the average American hates losses about two-and-a half times as much as they love gains. And big, controversial legislation always impacts either taxes or property rights or regulation, all of them. And whoever they help like it. But whoever they hinder, because to help somebody you got to hinder somebody else, they hate it even more. They hate it more than the people that like it, like it. And for an American, that's about two-and-a-half to one. For Europeans, that's more than that.

Ken Fisher: Again, a very long time ago Meir Statman and I documented, using the Thaler-Bernartzi methodology exactly the same way in data from Britain and Germany, that the average British person hates losses four times as much as the like gains—the average Germans six times as much. Europeans overall are just much more loss averse.

Ken Fisher: The fact is, as we all focus on the power of the politics of the most important economy in the world, what that does when there's big legislation is it scares.

Ken Fisher: But the President's party always knows when they first take office, right after the President's inauguration, that in the midterms, almost always the President's party loses relative power to the opposition party, a little or a lot. This time, hardcore gridlock.

Ken Fisher: But because the President’s party knows that when the President is first elected; they know that they have to get whatever is their biggest, most controversial legislation through in their first two years, because if they can't pass it in their first two years, they'll never get it passed after those midterms.

Ken Fisher: So, they push, push, push in those first two. And for all intents and purposes, all big controversial legislation in American history almost perfectly comes in the first two years, doesn't come in the back two.

Ken Fisher: After the midterms, you still get talking yakking rhetoric, but legislative reality becomes much calmer. Markets pre-price that, sometimes before the election, sometimes right after. This year we've had a good six-and-a-half percent run starting the day after the election, and the market was up before that during the quarter. It's a strong run.

Ken Fisher: The fact is, what the market's pre pricing is that quiet that comes from the gridlock. That extends over into the first and second quarters of the next year, the President's third year in his term. We haven't had a negative third year of a President's term since 1939, which was only down nine-tenths of 1% as World War II was starting, again linked to that one period where what I call midterm miracle of those nine months was negative. So, what I want you to see is that the election you may have liked as a Democrat a little bit because it came out better than Democrats expected it to. You may have hated as a Republican because it came out a little worse overall than Republicans hoped it would, in fact quite a lot worse—they hoped for the big red wave that didn't happen.

Ken Fisher: But for the stock market, you still get gridlock. And that's good for investment returns, good for stock market returns, and if I were you, I would think of it as maybe what I like politically, maybe what I dislike politically, but what you do like stock market wise. Thank you for listening to me.

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Ken Fisher: Subscribe to the Fisher Investments 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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