Stocks have often been bumpy in midterm years and stronger afterward, but a pattern built on a couple of dozen elections is a guide to what's normal, not a forecast.
Do midterm elections affect the stock market?
Historically, yes, though mostly through uncertainty rather than through who wins. Midterm years have tended to bring lower returns and deeper pullbacks than other years. The 12 months after the vote have tended to be strong. Those are averages from a small sample, and they don't predict any single year.
Midterm elections fall halfway through a president's four-year term. Every seat in the House of Representatives is on the ballot, along with about a third of the Senate. The outcome can change who controls Congress, which is why investors pay attention.
History offers one strong pattern on the politics. Capital Group found that over the past 23 midterms, the president's party lost an average of 27 House seats and three Senate seats. Only twice has it gained seats in both chambers. So a shift in power is often the expected result, not a shock.
The question for investors is what stocks tend to do around that shift. To answer it, this guide looks at the S&P 500, an index of about 500 large U.S. companies, in three stages: the midterm year itself, the pullback that often comes with it, and the year after.
How have stocks done in midterm years?
Midterm years have been positive on average, but weaker than other years. Capital Group calculated that since 1931, the S&P 500 has averaged a 4.7% return in midterm years, about half the 9.5% average for all other years. Those are price returns, which leave out dividends.
In dollars, that gap is easy to see. On a $10,000 investment, a 4.7% gain is $470 and a 9.5% gain is $950. Neither number is a promise, and few individual years land near the average.
U.S. Global Investors reported a similar picture over a slightly longer period. Since 1928, it said, the second year of a president's term has averaged a 3.3% price return, with a median of just 0.6%. The median is the middle result, and being so far below the average suggests a few strong years pull the average up. The firm also said only slightly more than half of those years finished higher.
Timing within the year matters too. Capital Group's chart of average midterm-year performance hovers between about +1% and -2% until late in the year. U.S. Global Investors said a typical midterm year bottoms about a month before Election Day, roughly 6% below where the year started.
Why are midterm years so bumpy?
Part of the answer is volatility, a measure of how widely prices swing. Capital Group found that since 1970, midterm years have had a median standard deviation of returns of nearly 16%, compared with 13% in all other years. Standard deviation is a way of measuring how spread out returns are.
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Compound growth estimate
Estimated total
$17,175
Your contributions
$13,000
This is an estimate, not a prediction. Monthly compounding; taxes, fees and inflation are excluded.
This article is for educational purposes only and isn't personalized financial, tax or legal advice. Consider talking with a qualified professional about your situation.
Kiara Miller — Founder & Editor
Kiara Miller is the founder and editor of The Evergreen Edit. He has been doing independent finance research for two decades and reviews every article before it's published.
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