Why the stock market may skip the usual midterm election rally

History shows that the stock market loves the post-midterm election period — but that may not be the case after the November 8 election this year.

“A lot of things are going to drive the stock market,” Gargi Chaudhuri, head of iShares investment strategy at BlackRock Americas, told Yahoo Finance Live. “I don’t want to base it solely on the Fed and the election. … But all else being equal, if you just give me a restrictive Fed and a divided government, I think it’s going to be really difficult for the stock market to make new highs or get back to the levels we’ve seen because maybe in the second quarter of this year with this framework.”

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The S&P 500 index (^GSPC) has historically outperformed in the 12 months following a midterm election, with an average return of 16.3%, according to US Bank data. For perspective, the last time the S&P 500 posted negative returns in the year following a midterm election was in 1939.

American flags fly in front of the New York Stock Exchange in New York on Friday, September 23, 2022.  Stocks around the world fell on Friday on more signs the global economy is slowing, while central banks are increasing the pressure with additional rate hikes.  (AP Photo/Mary Altaffer)

American flags fly in front of the New York Stock Exchange in New York on Friday, September 23, 2022. (AP Photo/Mary Altaffer)

The backdrop for equities this time around remains rocky, to say the least.

“I think it will be very difficult for the stock market to experience the rallies that we saw in the first two days of October,” Chaudhuri said.

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The Federal Reserve continues its mission to stamp out inflation by forcibly raising interest rates. Such hawkish Fed policy has impacted a range of asset markets, from a surging US dollar to rising mortgage rates approaching 7%.

Despite impressive rallies in the first two trading days of October, the Dow Jones Industrial Average (^DJI), S&P 500 and Nasdaq Composite (^IXIC) remain mired in double-digit percentage declines for the year. Shares in big-name tech companies like Meta (META) and Netflix (NFLX) are each down nearly 60% year over year as investors take profits on riskier stocks.

Oil prices have also started to rise again, especially after OPEC+ announced it would cut production. This has once again created significant headwinds for corporate profits.

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“I think we really need to see a sea change in the earnings picture where earnings growth is very healthy across all sectors,” Chaudhuri said, “and I just don’t see how that’s going to happen when we have an economy that’s slowing down because the Fed wants it.”

Brian Soci is a freelance editor and Anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.

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