Investing / The Compound Effect

Midterm election season again, and here is what markets actually do

2026-08-21 | 5 min | By Heath J. Harris

Midterm years are historically the weakest for stocks, but the 12 months after have been almost boringly reliable. Here is the pattern and the catch.

Midterm election season is here again, and the honest answer is this. Midterm years have historically been the weakest stretch of the four year presidential cycle, averaging roughly 7.5% versus a 12.4% overall average, according to BlackRock. But the 12 months after the votes are counted have been one of the more reliable patterns on Wall Street, with the S&P 500 higher in nearly every post-midterm period since 1950.

So the map looks like a valley followed by a climb. Getting choppy on the way in, calmer and stronger on the way out. That is the setup. Now the fine print, because the fine print is where people get hurt.

The valley before the vote

The pre-election stretch has a reputation, and it earned it. U.S. Bank, reviewing 31 midterms from 1900 forward using Bloomberg data, found the S&P 500 averaged just 2.9% in the 12 months before a midterm, well below the long run average. RBC Capital Markets went further, noting the index declined an average of 20.6% at some point during that pre-election year. Read that twice. On average, at some point in the run-up, stocks fell by a fifth.

That number sounds terrifying until you sit with it. A 20% drawdown that fully recovers is a very different animal than a 20% loss you lock in by selling. The drop is the price of admission. The recovery is the show. Investors who confuse the two pay dearly.

And yes, the recent examples sting. 2018 and 2022 were both midterm years, and both were rough. J.P. Morgan flags them as genuinely choppy. 2022 in particular was a down year across stocks and bonds. So nobody should pretend the valley is theoretical.

The climb after the count

Here is the part that keeps showing up no matter who runs the numbers. After a midterm, stocks have historically gone up, and not by a little.

Fidelity found the S&P 500 posted gains 95% of the time in the 12 months following midterms going back to 1938. Ameriprise pegs the one year gain at an average of 15.4% since 1950. Forbes counted 16 midterms since 1962 and 16 gains, averaging 14.2%. Yahoo Finance, going back to 1954, tallied 18 straight positive post-midterm periods averaging 18.2%. Dating to the 1926 midterm, the average 12 month return afterward was 13.6%, and it finished negative only twice.

Different windows, different start dates, same shape. The uncertainty that hangs over a midterm year tends to lift once the results are known, and markets price that relief.

But let us be adults about it. Sixteen or 18 observations is a small sample. The stock market rises over any random 12 month stretch about 70% of the time anyway, as Forbes points out. So some of this streak is just the market doing what the market does. And none of it establishes that elections caused the pattern. Economic growth, inflation, and the Fed do the heavy lifting. The election is the headline, not the engine. We made a similar point about how markets shrug off scary headlines in our note on why stocks hit records the same week the jobs report went negative.

What divided government actually does

Every cycle someone insists a particular arrangement in Washington is bullish or bearish. The data does not cooperate. U.S. Bank found no evidence that one configuration of political control consistently delivers stronger returns. Divided government has historically coincided with good performance, and BlackRock notes that scenarios where a party lost its trifecta (the presidency plus both chambers) saw some underperformance. Mixed signals, in other words.

The 2026 map is tight. Elections are set for November 3, 2026, covering all 435 House seats and 33 Senate seats plus two special elections, per Ballotpedia. Democrats need a net gain of three House districts to take the chamber. The margins are thin enough that a lot of people will be tempted to trade the outcome. That temptation is the risk.

The behavior gap is the real story

BlackRock said it cleanly. The bigger risk in a midterm year has not been the volatility, it has been how investors respond to it. That matches what J.P. Morgan found about sentiment. People feel great about the economy when their party holds power and sour fast when it does not. That confidence swing has nothing to do with your portfolio's actual returns, but it drives plenty of bad selling and bad buying.

The 2026 backdrop has its own wrinkles beyond politics. Fidelity notes the outlook has gotten cloudier as investors reassess the AI buildout and whether stocks got ahead of themselves. Persistent inflation and a narrowly divided Congress add to the jitters. After three straight double-digit years (16% in 2025, 23% in 2024, 24% in 2023), some cooling would not shock anyone.

None of that changes the discipline. The valley-then-climb pattern is a tendency, not a promise. It did not repeat cleanly in 2018 or 2022, and it may not repeat in 2026. What travels across every cycle is that the investors who get whipsawed are usually the ones who let the election calendar override their plan. If you want a longer view on why the finish line matters more than the news cycle, see our piece on the hardest math in retirement planning.

The move is not to predict the vote. The move is to own a plan that holds up whether the pattern shows up or not.

If you want help stress testing your own plan against a choppy election year, our team at Compound Advisory does this work every week.

Ready for a clearer retirement strategy? Schedule your complimentary Retirement Clarity Assessment at https://compoundadvisory.co/retirement-clarity-assessment.

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