History Says to Buy Stocks Right Now Before It's Too Late

If you have a long time horizon, arguably "now" is always the best time to buy stocks. After all, the S&P 500 index (SNPINDEX: ^GSPC) has always gone up over the long term. Even if you bought an S&P 500 exchange-traded fund (ETF), like the Vanguard S&P 500 ETF (NYSEMKT: VOO), right before a market crash, you'd still be in good shape over the long term, and even better if you kept dollar-cost averaging into the fund.

However, from a historical standpoint, now is actually the best time to invest in the market. If you break out the market into 16 quarters based on election cycles, the three strongest periods are the fourth quarter of year two following mid-term elections and the first and second quarters of year three. In other words, the three quarters coming up starting this October.

According to Carson Research, the S&P 500 has finished higher in the fourth quarter following a midterm election more than 84% of the time since 1950, producing an average return of 6.6% over that three-month stretch. The first quarter of the following year tends to be even stronger, with stocks rising nearly 95% of the time, with a strong 7.4% average gain. The second quarter of year three of the election cycle has also been good, with the S&P 500 posting positive returns nearly 74% of the time, with an average gain of 5%.

This data aligns with Fidelity research, which notes that the S&P 500 has posted gains in the 12 months following midterm elections 95% of the time since 1938. Meanwhile, the S&P 500 has averaged a 14.5% 12-month return from November to November since 1950.

Now the market has gone up regardless of which party is in the White House or which party wins the midterms. It also doesn't seem to matter much whether incumbents or challengers win. Just the relief from some political uncertainty seems to be the biggest catalyst for the market outperformance.

However, the Carson Group noted that stocks do tend to perform best when there is a split Congress. Since 1951, the S&P 500 has generated an average annual return of 17% during years with a Democratic president and a split Congress, and 13.7% during years with a Republican president and a split Congress.

How to invest

Now, while history can be used as a guide, it is far from a guarantee. That said, now looks like a good time to get into the market.

My recommendation for most investors is to use an index ETF or two as core holdings. This gives investors an instantly diversified portfolio and takes away the need to pick individual stocks, which can be quite difficult.

In fact, according to a J.P. Morgan study, between 1980 and 2020, 66% of stocks underperformed the market, and 42% posted absolute negative returns. What drove the market's performance was a handful of megawinners, accounting for about 10% of all stocks in the Russell 3000, which is composed of the 3,000 largest companies in the U.S. The mechanism in market-cap-weighted indexes that lets their winners run and become larger contributors over time is what ultimately drives performance. This is also why the S&P has outperformed 86% of all actively managed large-cap funds over the past decade.

Two top index ETFs I'd build a portfolio around are the Vanguard S&P 500 ETF and Invesco QQQ Trust (NASDAQ: QQQ). The Vanguard fund is a low-cost way (0.03% expense ratio) to track the performance of the S&P 500, while the Invesco fund (0.18% expense ratio) mimics the performance of the tech-heavy Nasdaq-100 index. Both have been great long-term performers, with the Vanguard ETF producing an average annual return of 15.3% over the past decade and the Invesco QQQ having a yearly return of 20.8% over the same stretch.

Dollar-cost average into these two funds, and you'll be set for the long term, whether the market sees its typical post-midterm election rally or not.

JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Invesco QQQ Trust and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.