When and how the U.S.'s midterm elections become an issue for stocks

After brushing off high-decibel trade spats between the U.S. and its global trading partners as well as President Donald Trump’s legal woes, the bull market’s next challenge might come from the ballot box.

“Markets will be closely watching the upcoming midterm elections as shifts in the balance of power in Washington could have meaningful implications for fiscal policy and foreign relations,” said Niladri Mukherjee, director of portfolio strategy in the Chief Investment Office at Merrill Lynch and U.S. Trust, in a note.

As with those other tangles, however, it isn’t clear that the midterm congressional elections on Nov. 6, which could conceivably see Republicans lose control of the House and, though less likely, the Senate, would be enough to derail the bull market.

A quick look at historical performance shows that stocks often see rough sledding in the September of years that feature midterm elections —and other years as well. For midterm years, analysts often chalk it up to uncertainty, since midterms typically see the incumbent president’s party lose seats. That same look at historical performance shows that stocks tend to do just fine as Election Day nears and in the aftermath of the vote, regardless of the outcome, as uncertainty begins to fade.

Read: Forget the September stock slump and brace for the market’s ‘best 9-month stretch’

UBS

Analysts led by Keith Parker at UBS note that the S&P 500 SPX, -0.17%  has rallied an average of 14.5% from the end of August to the end of March around midterm elections (see chart above). That includes a rocky start marked by a median decline of 1.4% from the end of August through early October followed by rally through year-end and into the next year. Moreover, the rally in equities around midterm elections has been much stronger than the

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