Stocks Fell After the Midterms. History Says the Next 12 Months Could Be Very Different

The recent U.S. midterm elections delivered a blow to equity markets, as voters expressed their opposition to data center expansion plans. All three major U.S. market indexes fell after the elections. Some investors may think that these are the early stages of the artificial intelligence (AI) bubble bursting and that equities will continue to move south over the next year.

However, history paints a very different picture. Let's see what typically happens to equities in the 12 months after the U.S. midterm elections.

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Is a sustained stock market run brewing?

It's not too surprising that elections affect equity markets, at least in the short run. The results can exacerbate uncertainty, something investors don't like. That's what happened this time around. How exactly will lawmakers and regulators try to limit the construction of data centers, if at all? What impact will that have on various leaders in the AI industry? How will they react?

These are all reasonable questions for which we don't yet have an answer. And considering some investors were already worried that AI stocks are overvalued, this added uncertainty doesn't help.

But this is nothing new. On many occasions in the past, midterm election results have raised concerns somewhat similar to these. Yet, equities tend to perform well in the 12 months following the midterm elections.

According to some data, since 1950, the S&P 500 has delivered average returns of about 15% in the 12 months following the midterms. Of course, the past is no guarantee of future performance, but there is an important lesson here for investors. Ultimately, business performance and economic growth are far more important to stock market returns than election results.

Government regulations can impact both, but over the long run, equities have performed well, and the economy has continued to grow amid changing administrations, significant legal and regulatory shifts, and high inflation. So, there is no need to worry too much about the recent post-election dip.

Here's how to navigate the current landscape

How should you invest in the current environment? Perhaps the most important thing to do is to remain calm. Panic selling isn't the way to go. Sticking with great stocks through thick and thin is an excellent way to earn above-average returns over the long run. The recent volatility doesn't change that.

It might even be wise to take advantage of other investors' inability to remain calm. What should you invest in right now? Let's consider three great options. The first is the Vanguard S&P 500 ETF (NYSEMKT:VOO). This index fund tracks the performance of the S&P 500 and has matched it almost to a T over the past five years. Its expense ratio (the percentage of your investment an ETF charges annually to cover expenses) is 0.03%, meaning you pay $3 annually for every $10,000 invested. The Vanguard S&P 500 ETF is an excellent way to take advantage of the S&P 500's tendency to perform well over the long run.

It's also a good idea to invest in beaten-down stocks right now. Here's one investors should consider: Netflix (NASDAQ:NFLX). The streaming specialist's trouble predates the recent sell-off. Over the past year, Netflix has dealt with somewhat disappointing financial results and guidance, as well as weaker-than-expected engagement.

However, Netflix is trading at near-10-year lows, according to one widely used valuation metric: the forward price-to-earnings ratio. Netflix is also slowly looking to turn things around. It is doubling down on original content and making a push into the lucrative sports streaming niche.

Given the company's large ecosystem of paid subscribers, it could explore other monetization opportunities. My view is that Netflix will bounce back and perform well over the medium term. Investors can also make the most of the recent volatility by investing in top stocks in defensive industries.

Johnson & Johnson (NYSE:JNJ) is a great option to consider. The healthcare giant boasts a diversified portfolio of products across pharmaceuticals and medical devices, delivers consistent revenue and earnings, and has a deep pipeline that allows it to launch brand-new products regularly, providing a solid defense against competition and patent cliffs.

Lastly, Johnson & Johnson has a phenomenal dividend program. It is a Dividend King, a company with at least 50 consecutive annual payout increases. Johnson & Johnson has a robust enough business to navigate a challenging economic environment and perform well over the long run, especially with dividends reinvested, making it a great pick right now.

Prosper Junior Bakiny has positions in Johnson & Johnson. The Motley Fool has positions in and recommends Netflix and Vanguard S&P 500 ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.