Why the S&P 500 Could Be Heading for a Repeat of 2018
Key Points
The S&P 500 doesn't always go up after midterm elections, with 2018 being a prime example.
Back then, President Trump was in the midst of his first term, and Republicans lost control of Congress in the midterms.
Given the uncertainty in the markets right now, many investors may want to consider diversifying and reducing risk.
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If the S&P 500 (SNPINDEX:^GSPC) is able to stay above a 10% gain for the year, it'll be the fourth consecutive year that it has been able to produce above-average returns. It's a rare feat. But it's not common for a reason, as sooner or later, there's inevitably a pullback.
The last time the market crashed was in 2022, when the broad index fell by more than 19%, due to rising interest rates. Over the broad part of the past five years, however, it's been fairly resilient.
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But I do see similarities between now and 2018, which could be cause for concern. That was during President Trump's first term in office, and midterm elections also took place that year. And, just like now, Republicans would end up losing control of Congress. While 2018 wasn't as bad as 2022, the S&P 500 did fall sharply in the last two months of the year.
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In 2018, the S&P 500 crashed following the midterms
There have been many articles discussing how the S&P 500 typically rises after the midterms. And while that's correct, there is a glaring exception to that, which is 2018. Unfortunately, there are also multiple parallels between then and now, including both who the U.S. president is and what happened during the midterms. Back in 2018, Republicans still held on to a majority in the Senate, but Democrats would obtain control of the House of Representatives.
Following the results, the stock market went into a tailspin. Between November and Christmas that year, the S&P 500 declined an incredible 14%. The index would recoup some gains after Christmas, as it would shrink its losses to about 8.5% between November and the end of the year.
Now is a good time for investors to look at reducing risk
Whether or not 2026 ends up being a repeat of 2018 or not, there are plenty of reasons to be extra cautious these days. Not only are valuations for many stocks incredibly high, but interest rates may rise again before the end of the year, inflation remains problematic, and although the overall economy is still doing well, there are many people who are struggling as consumer sentiment has been declining.
For investors who want to minimize risk, a good option may be to consider investing in exchange-traded funds (ETFs) that focus on stable sectors of the economy, such as utilities. The Vanguard Utilities ETF offers exposure to utility stocks while also paying a relatively high dividend that's currently yielding 2.8%.
Investors, however, have many ways to diversify beyond just tracking the S&P 500, and now may be a critical time to do so.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
