Key Points
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Since 1980, the S&P 500 index has posted a positive total return in each of the 12 months following a midterm election.
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Investors should continue to focus their efforts on identifying high-quality businesses to own for the long haul.
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While most major events are just noise when it comes to your portfolio, they can be invaluable in helping reset your perspective.
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The midterm elections are over. Starting in January, Democrats will take control of Congress from the Republicans. As usual, political change creates a backdrop for heightened stock market volatility. And this year was no different.
The biggest question mark is what impact, if any, the new political regime will have on the artificial intelligence (AI) build-out. Investors generally believe that the entire industry will be under more scrutiny. Moreover, data center construction could slow, a development that the hyperscalers, which are spending huge sums of capital, depend on so heavily.
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Uncertainty is the key theme. And investors are trying to figure out how to best position their portfolios. History shows there’s an investment strategy that has never failed after a midterm election.
Stick to the plan
Elections naturally get all of the attention. And media outlets never hesitate to draw connections between the political arena and your financial situation. This can drive a sense of urgency. You may feel like you need to take deliberate action immediately. That’s not the right thing to do.
This might come off as the most boring piece of advice ever. But the best move that investors can make is absolutely none. A smart investing strategy is to avoid making portfolio moves strictly based on election outcomes.
History proves that this is the optimal course of action from a purely financial standpoint. Since 1980, the S&P 500 index (SNPINDEX: ^GSPC) produced a positive total return over the 12 months right after a midterm election 100% of the time, with an average gain of 13.7%. It’s impossible to argue with this track record. It doesn’t matter whether Congress is blue or red.
You might start to think that this time will be different. After all, valuations are high. There’s geopolitical tension. Inflationary pressure is persisting. And the AI boom, which is sucking up so much capital, is sparking fears of a bubble.
To be clear, there are always reasons to worry. Seasoned market participants know that this is true. Uncertainty is nothing new. In fact, it’s par for the course.
History shows that staying invested in the stock market is the winning strategy. Over the long term, it pays off. On the other hand, panicking and backing out will prove to be a costly mistake.
The stocks worth owning haven’t changed
Investors are to do nothing after a midterm election. This leads to the next point: Investors’ specific portfolio management strategies don’t need to be altered. Everything should generally be viewed as noise, no matter how many headlines a particular topic grabs.
The recipe for long-term success in the stock market is still the same. It depends on identifying high-quality businesses that come with wide economic moats. These companies sell differentiated products and services. They have durable growth potential. From a financial perspective, they operate with solid balance sheets and generate consistent profits.
This is a good list of characteristics investors should look for. Once you’ve narrowed down a group of businesses, valuation comes into focus. It’s not ideal to buy stocks when they’re expensive. All else equal, purchasing shares at a margin of safety is optimal.
If picking stocks isn’t on your radar, then consider buying an S&P 500 tracker, like the Vanguard S&P 500 ETF (NYSEMKT: VOO). At an extremely low expense ratio of 0.03%, this exchange-traded fund (ETF) offers instant exposure to the biggest businesses powering the U.S. economy. You’ll own about 80% of the entire country’s stock market capitalization in a hassle-free manner that requires no active portfolio management.
The midterm elections are over. While your investing playbook won’t change, events like these should reset your perspective, which can be an invaluable exercise.
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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
