The 2026 midterm elections take place on Tuesday, November 3, and the weeks leading up to that date tend to bring a familiar set of questions from families and institutions: What has the market historically done in midterm years? Does the outcome matter? Is there anything a long-term investor should be doing differently? The historical record offers a partial answer to the first question, a clearer answer to the second, and a measured answer to the third.
This article reviews what the data show about equity market behavior around midterm elections, examines the explanations researchers have offered for the pattern, and spends deliberate time on what the record does not support. It is educational in nature, it does not forecast the election or the market, and it should not be read as a recommendation to change any portfolio.
The Four-Year Presidential Cycle in Brief
Market historians have long observed that average equity returns in the United States appear to vary with the position of the year within the four-year presidential term. The pattern, sometimes called the presidential election cycle theory, runs roughly as follows: the first year after a presidential election tends to produce modest returns as new policy is implemented; the second year, which contains the midterm elections, has historically been the weakest and the more volatile of the four; the third year has historically been the strongest; and the fourth, the presidential election year, has tended to deliver positive but uneven results.
The cycle is a statistical tendency drawn from a limited number of observations, not a law of markets. It has been documented across several data sets and time periods, and it has also been contradicted in individual cycles. Both facts matter, and the sections that follow attempt to hold them in view at the same time.
What the Data Show: Midterm Years Versus the Year After
The core finding is consistent across sources. Midterm years have historically produced below-average returns with above-average drawdowns, and the twelve months following the midterm election have historically produced returns well above the long-run average.
| Measure | Historical figure | Source and period |
|---|---|---|
| Average S&P 500 return in midterm (second) years | Approximately 5.8% | S&P 500 data since 1932, as compiled by Sequoia Financial Group |
| Average U.S. equity return in the 12 months before a midterm election | 2.9%, versus 8.9% for all years in the sample | U.S. Bank Asset Management Group Research, 31 midterm cycles, 1900 to 2025 |
| Average U.S. equity return in the 12 months after a midterm election | 12.4% | U.S. Bank Asset Management Group Research, same sample |
| Average post-midterm 12-month return, more recent samples | Approximately 14% to 16% | Fidelity (since 1938) and U.S. Bank (15 cycles over 60 years) |
| Frequency of positive 12-month return after a midterm | Positive in each of the 19 cycles since 1950; positive roughly 95% of the time since 1938 | Multiple sources including Fidelity and U.S. Bank |
| Average peak-to-trough drawdown in the year before a midterm | Approximately 19% | Longview Economics, 25 cycles since 1926 |
| Share of midterm years finishing positive | Approximately 87% | S&P 500 data since 1932 |
Figures above are drawn from published third-party research and are presented for historical context. Different sources use different index proxies (Dow Jones Industrial Average prior to 1929, S&P 500 thereafter), different start dates, and different measurement windows, which explains the range of averages. None of these figures is a forecast.
Two features of the record deserve emphasis. First, the drawdown statistic is at least as informative as the return statistic. A midterm year that finishes positive has often included an intra-year decline that felt considerably worse in real time than the calendar-year figure suggests. Second, the post-midterm rebound has not depended on which party gained or lost seats. It has appeared following elections in which the president’s party held Congress, lost one chamber, or lost both.
The 2022 cycle as a recent illustration
The 2022 midterm year offers a compact example. The S&P 500 declined through much of the year as the Federal Reserve raised policy rates at the fastest pace in four decades, reaching an intra-year low in mid-October, roughly four weeks before the November 8 election. Over the twelve months following the election, the index gained in the mid-teens on a total return basis and went on to record new highs in early 2024. The pattern held. It is equally true that the 2022 drawdown had an identifiable macroeconomic cause that had little to do with the election itself, a point addressed below.
Why the Pattern May Exist
Researchers and market strategists have proposed several explanations. None is fully proven, and more than one may operate at once.
Policy uncertainty and its resolution
The explanation cited with the greatest frequency is that markets tend to dislike uncertainty about future tax, regulatory, spending, and trade policy, and that midterm campaigns produce a concentrated dose of it. Investors are asked to price a wide distribution of possible outcomes while campaigns generate competing proposals. Once results are known, the range of plausible policy paths narrows for roughly two years, and capital that was held back may be redeployed. Under this view, what matters is not who wins but that the question has been settled.
The monetary and fiscal cycle
A second explanation looks to the timing of policy. Administrations have historically had some tendency to accept economic adjustment early in a term and to favor supportive fiscal conditions in the run-up to a presidential election. Monetary policy has at times followed a loosely similar rhythm. If policy tightening tends to cluster in the first half of a term and easing in the second half, the equity pattern may be partially a reflection of that rhythm rather than of the election as such.
Base effects and mean reversion
A third, more mechanical explanation is that strong post-midterm returns are partly a function of weak pre-midterm starting points. If the market has drawn down meaningfully in the months before the election, the subsequent twelve-month return is measured from a lower base. This does not make the pattern spurious, but it does suggest the two halves of the cycle should be read together rather than in isolation.
What the Record Does Not Say
Historical patterns of this kind are easy to overstate, and a disciplined reading of the midterm data includes several caveats.
- The sample is small. Depending on the start date, there are between 19 and 31 midterm cycles in the record. Statistical confidence in patterns drawn from that few observations is limited, and a single contrary outcome would not be surprising.
- Coincident events explain much of the variance. The weakest midterm years in the record coincided with the 1974 oil shock and recession, the 2002 aftermath of the technology bust, and the 2022 rate cycle. The strongest post-midterm rebounds followed those same episodes. Attributing the pattern to the election calendar rather than to the underlying economic events requires an assumption the data cannot verify.
- Averages mask dispersion. An average post-midterm return of 12% to 16% includes cycles that produced far more and cycles that produced considerably less. A family planning cash needs for the coming year should not treat the average as a base case.
- Party control has not been a reliable variable. Academic work has identified a modest historical premium under unified government, sometimes called the government gap, but other analyses find that returns under divided government match or exceed those under unified control. The disagreement itself is informative: the effect, if it exists, is not large enough to be consistently detected.
- Sector effects are real but are not the same as index effects. Election outcomes can and do affect the relative prospects of energy, healthcare, financials, defense, and other sectors. Those are questions of security selection and factor exposure, which is different from a question about the direction of the broad market.
- The current policy backdrop differs from prior cycles. The 2025 tax legislation made many of the individual and estate provisions that were scheduled to expire permanent, which removes a specific source of fiscal uncertainty that was present in some earlier midterm years. Whether that changes the pattern is unknowable in advance.
Divided Versus Unified Government
Because midterm elections frequently shift control of one or both chambers of Congress, investors often ask whether divided government is better or worse for markets. The historical answer is that the market has performed reasonably under both configurations. Divided government tends to reduce the probability of large legislative change in either direction, which some investors view as stabilizing. Unified government tends to increase the probability of significant legislation, which can be positive or negative for equities depending on its content. Neither configuration has produced a return premium large enough or consistent enough to justify positioning a diversified portfolio around it.
A more useful frame for families is to ask which specific policy areas are exposed in a given cycle and whether their own balance sheet has concentrated exposure to those areas. A family with a large position in a single sector, a business subject to a particular regulatory regime, or an estate plan that depends on a specific provision of the tax code has a legitimate reason to track the election closely. A family with a diversified portfolio and a durable plan generally does not need to react to it.
What Long-Term Investors Tend to Focus On Instead
The practical implication of the midterm record is not that investors should buy in October and sell the following November. Timing strategies built on calendar patterns have a poor track record once transaction costs, taxes, and the risk of being wrong in any single cycle are accounted for. The implication is closer to the opposite: the pattern is one more piece of evidence that volatility around identifiable events has historically been temporary, and that a plan designed to withstand it tends to fare better than a plan that reacts to it.
Several activities are worth attention during periods like the present one, not because of the election specifically but because volatility creates opportunities to execute them.
- Rebalancing. A drawdown in equities may move a portfolio away from its target allocation. Rebalancing back toward target during weakness is a disciplined way to act on volatility without forecasting its end.
- Tax-loss harvesting. Positions that have declined below cost basis may be harvested to offset realized gains elsewhere, with proceeds reinvested in a manner that preserves market exposure and respects wash-sale rules. Midterm-year drawdowns have historically created these opportunities in the September and October window.
- Liquidity planning. Families with known cash needs in the next twelve to twenty-four months may confirm that those needs are funded from sources that do not require selling equities at an inopportune time.
- Reviewing concentrated exposures. If a family’s wealth is concentrated in a sector or company with policy sensitivity, the pre-election period is a reasonable time to review hedging and diversification options, which are covered in several of our prior articles.
- Revisiting the plan, not the forecast. The question to ask is not “what happens if my candidate loses” but “does my plan still work under the range of plausible outcomes.” If the answer is yes, the election becomes an event to observe rather than one to trade.
A Note on Polls, Prediction Markets, and Headlines
In the weeks before an election, investors are exposed to a high volume of polling data, prediction market odds, and commentary about what a given outcome would mean for stocks. Two observations may help in processing that information. First, markets are forward looking and incorporate the consensus expectation continuously, so an outcome that matches expectations tends to produce a muted reaction, while a surprise can produce a sharp one in either direction. Second, the historical record suggests that even sharp initial reactions have tended to fade as attention returns to earnings, interest rates, and economic growth. The election is one input among many, and its influence on returns has historically been smaller than its share of the news cycle would imply.
Closing Perspective
Midterm election years have historically been uncomfortable for equity investors, and the twelve months that follow have historically been rewarding. That pattern has held with notable consistency over seven decades, and it has held regardless of which party prevailed. It is also a pattern built on a small sample, shaped by economic events that happened to coincide with the calendar, and expressed as averages that conceal wide variation. Both of those descriptions are accurate. The appropriate response to the record is neither to trade it nor to dismiss it, but to let it reinforce a longer-standing lesson: portfolios built for a range of outcomes, and reviewed with discipline rather than reaction, have historically served families well through election cycles of every kind.
Key Takeaways
- Midterm years have historically been the weakest and more volatile of the four-year presidential cycle, with average intra-year drawdowns near 19%.
- The twelve months following a midterm election have historically produced above-average returns, and the S&P 500 has been positive over that window in every cycle since 1950.
- The pattern has appeared regardless of which party gained or lost congressional seats.
- The record rests on a small sample and is heavily influenced by coincident economic events; it is context, not a forecast.
- Divided and unified government have both been associated with acceptable market outcomes; neither justifies repositioning a diversified portfolio.
- Volatility around elections tends to create opportunities for rebalancing, tax-loss harvesting, and liquidity review, which are more productive uses of the period than attempts at timing.
Frequently Asked Questions
How has the stock market historically performed in midterm election years?
Midterm years have historically been the weakest year of the four-year presidential cycle for the S&P 500, with average calendar-year returns in the mid-single digits and average intra-year drawdowns near 19%. Roughly 87% of midterm years since 1932 have finished with positive returns despite those drawdowns.
What happens to stocks after midterm elections?
The twelve months following a midterm election have historically produced returns well above the long-run average, with published estimates ranging from about 12% to 16% depending on the sample. The S&P 500 has been positive over that window in each of the 19 midterm cycles since 1950. Past patterns do not predict future results.
Does it matter which party wins the midterms?
Historically, the broad market pattern around midterms has not depended on which party gained or lost seats. Individual sectors can be affected by policy outcomes, but index-level returns have not shown a consistent relationship with the partisan result.
Is divided government good for the stock market?
Markets have performed reasonably under both divided and unified government. Some academic research finds a modest premium under unified control, while other analyses find divided government matches or exceeds it. The effect is not large or consistent enough to be a basis for portfolio decisions.
Should I change my portfolio before the 2026 midterm elections?
For a diversified, long-term portfolio, the historical record does not support repositioning around the election. Periods of election-related volatility may present opportunities for rebalancing, tax-loss harvesting, and liquidity review. Families with concentrated exposure to a policy-sensitive sector may have specific reasons to review that exposure with their advisor.
When are the 2026 midterm elections?
The 2026 United States midterm elections are scheduled for Tuesday, November 3, 2026. All 435 House seats and roughly one-third of Senate seats are on the ballot, along with numerous state and local offices.
This material is provided for educational and informational purposes and does not constitute investment advice or a recommendation to buy or sell any security. Historical market data cited are drawn from published third-party research and are believed to be reliable but have not been independently verified. Index returns do not reflect fees, expenses, or taxes, and it is not possible to invest directly in an index. Past performance is not indicative of future results. Nothing in this article should be interpreted as a prediction regarding the outcome of any election or the future direction of any market.
Certuity, LLC is a registered investment adviser; registration does not imply a certain level of skill or training. Investing involves risk, including possible loss of principal. The strategies described may not be appropriate for every investor and depend on individual facts and circumstances. Please consult your own tax, legal, and financial professionals regarding your specific situation.