The midterm elections could send the Dow tumbling this year, history shows

A man has his photo taken hanging from a bull sculpture outside Las Ventas bullring during San Isidro's bullfighting fair in Madrid, Spain.

Susana Vera | Reuters
A man has his photo taken hanging from a bull sculpture outside Las Ventas bullring during San Isidro’s bullfighting fair in Madrid, Spain.

It has been a tough year for the Dow Jones industrial average thus far as the 30-stock index struggles for gains. History shows it could get a lot tougher because of the midterm elections scheduled for later in 2018.

Since 1913, the Dow has fallen an average of 20.4 percent from the highs reached the year following a presidential election to the lows carved out in a midterm election year, according to data compiled by Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.

The Dow’s high for 2017 is 24,876, nearly 4 percent above where the index was trading on Wednesday. A 20.4 percent decline from the Dow’s 2017 high would bring it to 19,801, about 25 percent below the all-time high reached on Jan. 26 and about 16 percent below the Dow’s current level. For 2018, the Dow is down 3.1 percent.

Republicans currently hold majorities in both the House and Senate. But a shift in leadership away from the GOP to the Democratic party in either chamber would hinder Republicans’ ability to pass more legislation similar to the tax reform bill last year.

Nicholas Colas, co-founder of DataTrek Research, said it will be tough for Republicans to maintain control of the House at this point.

“Right now, they do outnumber Democrats in the lower house by 44 votes (237 to 193, with six vacancies). Even with that lead, 37 House Republicans have announced they will not stand for reelection – a record since at least 1952 – opening up the field much more than a typical midterm election cycle,” Colas said in a note earlier this month.

The Dow tends to recover sharply the year after a midterm election, however. Wells Fargo’s Wren pointed out that since 1914, the Dow has rallied an average of 47.4 percent from its midterm election year low to its high in the subsequent year.

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