After the midterm, get ready for a "relief" rally in stocks

Last Updated Nov 7, 2018 3:41 PM EST

If history is any guide, investors can look forward to some good news after the midterms: A stock market rally. Every midterm election over the past 60 years has been followed by a rise in stocks, sometimes called a "relief rally," market research shows.

Over the past 50 years, the S&P 500 has jumped an average of 16 percent the year following a midterm election, according to Capital Economics. And on Wednesday, as if on cue, stocks soared, with the S&P 500 and Dow indexes  each gaining around 2 percent by mid-afternoon.

John Lynch, chief investment strategist at LPL Financial Research, crunched the numbers for the 18 midterm elections since 1946. In each case, the S&P 500 (or its equivalent) had gained significantly a year after the election -- regardless of the results.   

While historical patterns don't predict the future, these trends may offer solace to investors whipsawed by the volatile trading last month. One reason for the October slump, analysts say: Markets are pricing in pre-election uncertainty.

Once the votes are tallied, "that uncertainty is eliminated, [and] we know what the playing field looks like," Torsten Slok, chief international economist at Deutsche Bank, told CBS MoneyWatch this week. The specific results, in other words, are less important than knowing what the results are.

Why gridlock is "good" 

Investors can also take comfort knowing the spending climate in Washington has been fairly steady, regardless of which party is in charge. "People focus so much on the election, but how much of the budget is fixed? 80, 85 percent," said LPL's Lynch.

Under a Republican president and a split Congress—the outcome expected by most political and economic forecasters—the S&P 500 has generated an average return of 15 percent, according to LPL.

The lesson? Although government gridlock is often denounced by citizens and politicians alike, it isn't bad news for markets. 

"If politicians don't change the rules of the game and the rules of doing business too much, businesses can have at least a little bit of a longer planning horizon," Slok said.