The connection between politics and stock market gains could become more evident as voters head to the polls for the midterm elections and as Barack Obama heads into his third year as president of the United States. If historical trends hold true to form, the U.S. stock market could experience a rally that extends at least 90 days after the midterm elections, and next year during the third year of a presidential term, the stock market could match gains that have averaged more than 10% dating back to 1871.

Brian Gendreau, market strategist for Financial Network Investments, has completed a study revealing that the Dow Jones Industrial Average has risen in the 90 trading days following 19 of the past 22 mid-term elections by an average of 8.5%. Gendreau studied changes in the Dow during all midterm elections that occurred between 1922 and 2006 and says the pattern of the stock market rallying after midterm elections should hold consistent this year, as the Republicans seem poised to gain seats in the House of Representatives and the Senate.

"It's a pretty strong historical pattern that doesn't work every time, but is a little too hard to ignore," says Gendreau.

Gendreau said that the incumbent party losing seats and the stock market rallying seem to go hand-in-hand during the midterm elections, but it has little to do with voters preferring Republicans over Democrats, or whether or not the incumbent party loses control of the Senate or the House. He said the mid-term elections affect the markets in two major ways:

Mid-term elections generally create gridlock, which usually moves markets higher. Gendreau said the cliché that the market likes gridlock often proves true because, "There is a more even balance of power between the executive and the legislative branch, and that means compromises are more likely...or at least one party's dominating legislative agenda is not as likely."

He suggests gridlock moves more legislators to the center, which can get more economic proposals to jump-start the economy passed, keeping markets happy.

Election outcomes take the risk out of the market. Gendreau said that since corporations don't know the outcome prior to elections, this establishes a "risk premium" in the market that can cause companies to act more conservatively, which can affect earnings. Once the risk is removed, dividends tend to go down and price-to-earnings ratios go up. Valuations increase.

"The market hates uncertainty – that we know – but once the elections are resolved one way or the other, that uncertainty comes out of the market and the market goes up," said Gendreau.

The Dow has already been climbing in anticipation of the midterm elections, a trend Gendreau said was consistent in all the elections he studied. According to his research, the market has always rallied at least 30 days before the midterm elections as the market begins to anticipate the outcomes. This year, the market began rallying in September when economic reports were positive enough to refute fears of a double-dip recession. For investors, Gendreau said that could mean "the post election bounce would be a little weaker because a lot of it would have already occurred before the election."

If the post midterm election rally doesn't produce the average 8.5% gains in 90 days, investors can still look forward to the 10% gains Gendreau's prior research forecasts for the third year of a president's term. Even more optimistically, DailyFinance reported that Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac suggests an even bigger windfall during the third year of a presidency -- an average 50% gain from the market low in the midterm year to the market high in the year before the presidential election.

So for investors who have been fed up with Washington politics over the last few years, perhaps the historic potential for stock market gains in 2011 are the closest thing to a bailout the politicians will ever offer.

"Buy call options on the S&P 500 -- that's what I would do," Gendreau said. "But if that's a bit much for most investors, the best thing you can do is go long and stay long."

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hotspringspark

After the 2012 election, upon the sale of property the seller will be required to pay 3.8 per cent of the gross salesprice to the US government, the IRS. Thats $5,700 on a $150,000 home.Why? To support Obamas health care take over. Read the bill, its in there.

November 02 2010 at 8:43 AM Report abuse +6 rate up rate down Reply
hotspringspark

After the 2012 election, upon the sale of property the seller will be required to pay 3.8 per cent of the gross salesprice to the US government, the IRS. Thats $5,700 on a $150,000 home.Why? To support Obamas health care take over. Read the bill, its in there.

November 02 2010 at 8:40 AM Report abuse rate up rate down Reply
dvdxmssn

On all this taxes, stock market and jobs talk, there is one thing for sure. People spend their money better than the government.

November 02 2010 at 8:31 AM Report abuse +5 rate up rate down Reply
jamesflea

Business' care about profits ... this allows them to provide jobs, benefits, retirments, and products to try to hold this country together. Regulations must control pollution and environment. Without business , no jobs, no profits, no economy, no USA....just government handouts. Its about $1.00/day in Cuba. Stock market should go up if socialists/communists/big spenders/ bankrupters of USA are ousted.

November 02 2010 at 8:27 AM Report abuse +2 rate up rate down Reply
1 reply to jamesflea's comment
dvdxmssn

Where are the jobs the government supplies. They are all inefficiant and uneconomical short term jobs.

November 02 2010 at 8:34 AM Report abuse +2 rate up rate down Reply
Janice

This is because the only thing that Republicans and conservatives really care about is their own pocketbooks. They are pro-big business and don't give a crap about civil rights, the environment or people. Businesses only care about the bottom line which is why they'll lie, cheat and pollute. Of course the stocks will go up while the rest of the country goes down the toilet.

November 02 2010 at 7:54 AM Report abuse -2 rate up rate down Reply
1 reply to Janice's comment
dano91944

you are one silly piece of work...wait till you hit the magic numbers 65... go buy your bread and milk and see if the cost of living went down...

November 02 2010 at 8:10 AM Report abuse +4 rate up rate down Reply
slowhand720

If Repbublicans take congress the Bush tax cuts will hopefully stay in place. This will allow Businesses to prosper in this environment. As they do, jobs will be added. Increase in business capital and more people working will actually cause TAX REVINUES TO INCREASE. People do some homework. It happens every single time in US histroy. Why do you think they call the roaring twenties the roaring twenties. Controlling government spending, reducing the debt and an increase in business and jobs will cause the market to do better. These are the reasons the stock market will do better in the next couple of years.

November 02 2010 at 6:53 AM Report abuse +1 rate up rate down Reply
Sukeycat

Even Bush gave seniors a cost of living raise on their SOCIAL SECURITY. Obozo did not for two years(so far.} I will remember this today when I go and vote Republican down the line. P.S.........I`m a pissed off registered Democrat that didn`t vote for Obozo and will not vote for Obozo in 2012.

November 02 2010 at 6:33 AM Report abuse +1 rate up rate down Reply
2 replies to Sukeycat's comment
Janice

Mr. Wonderful: The cost of living didn't go up so there is no reason for a COLA. Also, it isn't up to the president or anyone else. The law in place calculates whether or not a COLA is in order and no one can do anything to give one or take one away. You're a moron.

November 02 2010 at 7:56 AM Report abuse +2 rate up rate down Reply
hotspringspark

After the 2012 election, upon the sale of property the seller will be required to pay 3.8 per cent of the gross salesprice to the US government, the IRS. Thats $5,700 on a $150,000 home.Why? To support Obamas health care take over. Read the bill, its in there.

November 02 2010 at 8:42 AM Report abuse rate up rate down Reply
MSmailbox

"If history repeats itself," the Japanese will bomb Pearl Harbor on December 7!

November 01 2010 at 10:20 PM Report abuse -5 rate up rate down Reply
punnster

If the Republicans take the House, expect a jump in the market. If the Republicans take the Senate too, The market will soar.

November 01 2010 at 10:08 PM Report abuse +7 rate up rate down Reply
punnster

The only thing that seems to SPARK rallies is the posiblity of Republicans taking the government away from the Democrats.

November 01 2010 at 10:06 PM Report abuse +5 rate up rate down Reply