The Midterm Election Cycle and Stock Market Returns

Although the twelve-month period leading up to midterm elections is often considered a weak stretch for markets, that pattern isn’t universal. In the past fifteen midterm cycles, about 60% showed underperformance in the year before the election. This year appears to be one of them.

So, what does history tell us?

• All fifteen midterm cycles showed positive returns in the six months following the election.
• All fifteen showed positive returns in the full year after the election.
• In underperforming pre-election years, the average return in the following year was 19.22%.
• In years with negative pre-election performance, the next year averaged an even stronger return of 22.43%.
• The third year of a newly elected presidency tends to deliver the strongest stock market performance in the four-year cycle.

There are other factors that may contribute to post-election recoveries. Historically, booms often follow pandemics, recessions, or major tax cuts. On the flip side, low immigration, high tariffs, and tax increases can be headwinds.

While election cycles can provide useful context, they aren’t the whole story. Markets respond to a complex mix of economic, political, and global forces. Still, the historical consistency of post-midterm recoveries is striking — and worth keeping in mind as we navigate the months ahead.

Katz Family Financial