U.S. midterm elections are looming on the calendar and the political rhetoric has been predictably mindless. I quote the great American writer Mark Twain: “Suppose you were an idiot, and suppose you were a member of Congress. But I repeat myself.”

Many of my readers are agitated by the current political climate and they’re wondering how to position their portfolios ahead of the voting. But always remember this: making investment decisions according to political preferences and fears is a prime example of “the dumb money.”

Below, I’ll explain why the midterms elections are a bullish factor, no matter what the polls are saying and which party prevails.

First, a quick look at recent market action. In addition to politics, the Federal Reserve and monetary policy dominate the news. Investors seem to be betting that the Fed will pause interest rate hikes after its December Federal Open Market Committee (FOMC) meeting, especially if inflation continues to show signs of easing.

The major U.S. equity indices closed sharply higher Thursday and were extending their gains in pre-market trading Friday. The indices are on track for snapping three consecutive weeks of losses and closing the week in positive territory. The evidence is increasingly clear that the bear market has bottomed.

Shifting fortunes…

The midterm elections in the U.S. are scheduled for Tuesday, November 8. Historically, the party that’s out of the White House tends to do well in the midterms, but this cycle is shaping up to be different.

Democrats control the White House, the U.S. House, and the U.S. Senate (the latter chamber by 50-50, with the vice president as the tie-breaking vote). At first, the polls showed that we faced a “red wave” in November, with Republicans recapturing both chambers of Congress, but surprisingly, the most recent polling shows Democrats in the lead in terms of a generic ballot.

President Biden’s popularity has been ticking upward, in the wake of major legislative accomplishments, the jobs market remains robust, and while inflation is still elevated, the prices of key goods (e.g., gasoline) have been falling.

Additional tailwinds for the Democrats include the latest legal hassles and antics of ex-President Donald Trump and the recent Supreme Court decision to overturn Roe v. Wade. Independents, moderates, and women are moving decisively into the Democratic camp.

So what do these shifting poll numbers mean for investors? Absolutely nothing.

The sheer occurrence of these elections is what matters…and it’s a bullish factor. Wall Street hates the unknown, but as soon as the voting is over and political uncertainty ends, the markets embark on an extended “relief rally.”

Regardless of which party wins, the period following midterm elections tends to be strongly bullish for the stock market (see chart).

In the 12 months leading up to election day, market performance typically is volatile and muted, roughly resembling what we’ve seen so far in 2022. However, in the 12 months after the voting, market returns are highly positive, on average by about 15%, whether Democrats or Republicans triumph, or whether political control is split. If Wall Street has a preference, it’s for voting that results in divided government, because gridlock allows corporate managers to make plans with greater assurance.

If you’re a Republican who dumped stocks because Democrat Obama won the presidency in 2008, you missed an enormous bull run. If you’re a Democrat who dumped stocks because Republican Trump won in 2016, you likewise missed a long powerful rally. And whether you supported Biden or Trump in 2020, the S&P 500 in 2021 capped its best year ever following a U.S. presidential election.

Mixing politics and investing is a loser’s game. The market is an economic barometer, not a political one. Stocks move according to fundamentals.

And one of the most fundamental ways to reap outsized gains is to tap investment megatrends. That’s why our experts have pinpointed eight technological developments with unstoppable momentum. When we’ve put the midterm elections behind us, certain well-positioned companies are likely to explode on the upside. Click here for details.

John Persinos is the editorial director of Investing Daily.

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