The midterm elections are just a week away, and if you’re like me, the volume of political ads (and questions about the midterms' potential impact on markets) is rising quickly! From a market perspective, midterm election years tend to be more volatile than other years. For example, the average S&P 500 drawdown (peak-to-trough decline) in midterm election years is 19%, whereas in the other three years of the presidential cycle, it averages 12%.
This year has been light in that respect, even with some bouts of volatility, as the S&P 500’s max drawdown sits at 9.1% (dating back to Q1). We could certainly get an uptick in volatility (for a number of reasons) between now and Election Day next Tuesday, but the key for the markets, at least historically, has been getting past the election date. That’s because better performance for the market usually comes post-midterms:
• Since 1950, November is the S&P 500’s second best-performing month in midterm years, up an average of 2.7% and higher 79% of the time.
• Going back to 1974, the S&P 500 averaged a 5.7% return in the three months following midterms (positive 85% of the time) and a 12.4% return in the six months post-midterms (positive 100% of the time).
• The next three quarters, Q4 of a midterm year (up an average of 6.6%) and Q1 and Q2 of a pre-election year (up an average of 7.4% and 5%, respectively), are the three best quarters out of the entire four-year presidential cycle. Some of the negatives consist of high interest rates (and a potential Fed hiking cycle), sticky inflation, narrow market breadth, possible AI dangers, ongoing wars, and lofty valuations.
• From 1930-2026, the S&P 500 never declined in the 12 months following a midterm election, with an average return of 14% (considerably higher than the S&P 500’s historical average annual return of 10.5%)
• Dating back to the 1880s, a divided government under a Republican president followed 14 midterm elections (the most occurrences of any outcome and a distinct possibility again), with the stock market averaging a subsequent 12-month return of 18% (positive 93% of the time).
I have told all of you that I may move money out of bonds and into growth positions in November or December. I have decided to do so right after the election next Wednesday because of the historical realities. If you want to talk about this, please call me; if not, I will make the move.
Here’s why I believe this can be helpful. These statistics can support the case for staying the course. But as we know, past performance is not a guarantee of future results. And there are many other important factors in play that will drive future returns.
As I’ve covered, some of the positives include a resilient economy,
• Democrats Sweep (D Senate, D House): 66%: A blue wave would be a boon for clean energy as democrats traditionally elevate clean energy mandates, green subsidies, and climate policy. Counterintuitively, clean energy investments have performed remarkably well under both of Trump’s terms.
• Divided Congress (R Senate, D House): 26%: Even with a divided Congress, defense spending has bipartisan support due to national security concerns, especially with an ongoing U.S./Iran conflict and other possible geopolitical conflicts popping up at a moment’s notice. The iShares U.S. Aerospace & Defense ETF (ITA) is a way to express a targeted view on the growth of domestic aerospace and defense companies, including manufacturers of commercial and military aircraft.
• Republicans Sweep (R Senate, R House): 8%: A red wave would be beneficial for AI, as Trump and many Republican leaders advocate for the growth of AI and data center infrastructure because they see it as necessary to maintain U.S. technological superiority over China.
Bottom line: Ultimately, the votes get counted, the uncertainty clears, businesses refocus on making money, consumers get back to living their daily lives, and markets move on to other things. Regardless of midterm noise and outcomes, the general takeaway for investors is to remain committed to long-term objectives, stay patient through phases of volatility, and resist emotional portfolio moves based on election headlines or results.
Source: Sevens Report 10/26/26