Hi, my name is Meera Pandit, global market strategist at JP Morgan Asset Management. Welcome to On the Minds of Investors. Today's topic-- how should I invest around the midterm elections. The 2022 midterm elections are just days away and many investors are wondering how these elections may impact their portfolios. Although many investors fear the impact of politics on their portfolios, history shows election related market volatility is typically short lived and it is policy, not politics that influences the economy and markets over time. As highlighted in the chart below, markets tend to be more volatile in the lead up to elections because elections are a source of uncertainty. However, by the time the election uncertainty settles down markets have already settled up.

The most recent two presidential elections are prime examples of this. Markets rallied strongly in the days following the election in both cases despite different results. This highlights another important dynamic we tend to see around midterms. Markets tend to rally regardless of which party is triumphant. Typically, 4Q returns after midterms are strong. Median returns were -1%, 2%, and 5% respectively for the 3/4 of each midterm year since 1942, but fourth quarter returns jumped to 8%. However, there are two notable exceptions-- 2018 and 1994. The Fed was tightening monetary policy during both of those periods and the fourth quarter returns on the S&P 500 were negative. This could be a telling experience as the Fed continues to tighten monetary policy this year.

We may see a brief post-election rally but it could be challenged by a hawkish Fed. In this environment, the Fed is a signal and the midterms are the noise. If we look out over the medium term and consider policy implications after the election, we are very likely to see some form of divided government which could relegate fiscal policy to the back seat. Divided governments tend to be marked by political gridlock and policy stalemates which should limit government spending and borrowing keeping deficits over the next two years contained.

In addition, growth and returns have been solid during divided government. The economy grew on average at a 2.7% pace under divided government and market returns were 7.9%. Elections tend to lead to a lot of hand-wringing from investors. But history shows that short term volatility tends to give way to market calm therefore investors ought to remain disciplined and focused on the fundamentals through election season.