Because politicians have too much power

Jim McTague devotes his latest “D.C. Current” column in Barron’s to an interesting historical pattern involving the stock market and midterm elections.

Buzz cut, anyone? This is a midterm-election year, and so the demon barber of Wall Street is stropping his straight razor with an eye to hacking away at the Standard & Poor’s 500. Anyway, that’s what the old saw tells us. According to 68 years’ worth of data, the market takes a haircut during the second and third quarters, before the midterm, reflecting the economic impact of political turbulence. And politics this year are especially turbulent. President Barack Obama’s low standing in the popularity polls has pundits predicting that Democrats have scant chance of recapturing the House from the Republicans, their fondest dream. And superstar statistician Nate Silver, who predicted Obama’s defeat of Mitt Romney in 2012, claims that the GOP, at the moment, enjoys a slight advantage in this year’s contest for control of the Senate, presaging another two years of lame-duck status for Obama.

AS IF ALL OF THIS weren’t enough, the Supreme Court injected more turbulence into the political equation last week when it struck down limits on campaign donations. The ruling’s impact on the midterms will be enormous; now, billionaires can invest in a portfolio of candidates. …

… Midterm-election-year behavior has been consistent since 1945. Since 1970, based on total returns, the average second quarter produced a 2.5% decline in the S&P 500, Stovall says, versus an average gain of 2.7% during the second quarter for all years. The safest stock sectors have been consumer staples and health care, with average total returns of 3.1% and 1.5%, respectively. And it’s not only large-caps that get a haircut. Since its inception in 1978, the Russell 2000 also has had its weakest quarters in midterm-election years, with average price declines of 3.5% in the second quarter and 6.6% in the third.

Financials and utilities have been the worst-performing, with respective average losses—again, based on total returns since 1970—of 4.5% and 4.4%. In light of the Supreme Court decision, I would venture that the stocks of companies with television stations in states with red-hot Senate races should evade the midterm curse. These are places like Kentucky, where the Democrats are piling on Republican incumbent Mitch McConnell; North Carolina, which went for Romney in 2012, causing the GOP to target Democrat Kay Hagan; and Louisiana, where Obama’s foot-dragging on the Keystone XL pipeline is placing Democrat Mary Landrieu at risk.

Wondering why concerns about Washington, D.C., have such a consistent negative impact on the market at this point in an election cycle? Because politicians have too much power over our lives, including the economy.

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