Next Headwind for U.S. Stocks Rally Could Be Midterm Elections

(Bloomberg) -- Soaring bond yields, a resurgent dollar and the return of volatility. U.S. stocks have struggled to make much headway this year faced with a growing number of headwinds. Add midterm election uncertainty to the list.

That’s the view of strategists at Goldman Sachs Asset Management, who note that equities tend to drift through summer in an election year, with the uncertain outcome likely holding back gains.

“As the 2018 U.S. midterm elections approach, we have observed that historical S&P 500 returns have been muted during the last 11 pre-election summers,” the analysts wrote in a recent note.

Historically, stocks lose on average 1 percent in the May-September period of a midterm election year, according to the report. In years when Democrats won control of the House, they show a gain of 1 percent, it said.

The good news is that investors are rewarded for their patience, according to Goldman Sachs. Average returns during a post-election October-to-December rally are 8 percent, it said.

The S&P 500 Index has risen 2.2 percent so far this year, having been up as much as 7.5 percent at the end of January. A rise in volatility, trade-war tensions and 10-year Treasury yields at the highest since 2011 have all taken turns to hold back the rally.

In November’s midterms, Republicans are trying to buck a historical trend in which the party that holds the White House almost always loses congressional seats. The Democratic Party is counting on a voting base energized by anger at President Donald Trump to win the 23 seats it would need to gain a majority in the House.

©2018 Bloomberg L.P.

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