S&P 500 Midterm Election Year – Stocks, Win Rate, Performance, Returns
Midterm elections, occurring every four years halfway through a U.S. president’s term, are events that can reshape Congress and influence legislative agendas.
Given their potential impact on economic policy, it’s natural for investors to wonder how these elections affect the S&P 500, a key benchmark for U.S. stock market performance.
This analysis looks at historical trends, potential reasons for observed patterns, and considerations for investors, aiming to provide a understanding of the likelihood of the S&P 500 rising after a midterm election year. We look at stocks, win rate, performance, and returns.
Defining Midterm Elections and Market Relevance
Midterm elections involve voting for all 435 seats in the House of Representatives and one-third of the 100 seats in the Senate, typically held in November of even-numbered years, not coinciding with presidential elections.
These elections can shift control of Congress, potentially altering policy directions on taxes, spending, and regulations, which can influence investor sentiment and market dynamics. The uncertainty leading up to these elections often creates volatility, but historical data suggests a notable shift in market behavior afterward.
Historical Performance: A Closer Look at the Data
Historical analysis reveals a consistent pattern of the S&P 500 performing strongly in the year following midterm elections.
According to U.S. Bank’s study of market data over the past 60 years, covering 15 midterm elections, the S&P 500 has historically achieved an average return of 16.3% in the 12 months after midterms. This is significantly higher than the 0.3% average return in the 12 months leading up to midterms, which underperforms compared to the S&P 500’s long-term average annual return of approximately 8.1%.
Further supporting this trend, E*TRADE’s analysis of midterm election years since 1962 found that the S&P 500 has never posted a negative return in the October-to-October period following midterms, with an average gain of 16.3%—nearly double its return in non-election years.
Notably, the last negative return in the 12 months after a midterm was in 1939, during the Great Depression and the early stages of World War II, highlighting the robustness of this pattern across various economic conditions.
To illustrate, consider the following table summarizing key historical performance metrics:
| Period | S&P 500 Average Return | Notes |
|---|---|---|
| 12 months before midterm | 0.3% | 12 months after the midterm |
| 12 months after midterm | 16.3% | Outperforms, with no negative returns since 1939. |
This data, drawn from U.S. Bank: Stock Market Performance After Mid-term Elections and corroborated by E*TRADE, underscores a market tendency to rally post-midterm, possibly reflecting a resolution of political uncertainty.
Reasons Behind the Midterm Election Boost
Several theories explain why the S&P 500 might perform better after midterm elections. One prominent factor is the reduction in policy uncertainty. During the election period, investors face ambiguity about potential shifts in congressional control and policy directions, which can lead to cautious market behavior.
Once the election results are known, and the new congressional makeup is established, investors can better anticipate future legislative actions, potentially boosting confidence and driving stock prices upward.
Another contributing factor could be the economic cycle. Midterm elections often occur at a point when the economy is maturing, typically in the latter half of a presidential term.
Historical data suggests that markets tend to perform well during these stages, possibly due to anticipated policy stability or economic momentum. Additionally, the resolution of political gridlock or the anticipation of legislative progress, such as infrastructure bills or tax reforms, can further enhance investor optimism.
While these explanations are plausible, it’s worth noting that other sources, such as Reuters factboxes from 2010, suggest that the S&P 500 has historically gained 7.46% in the three months following midterms compared to 2.35% in the two months prior, aligning with the idea of a post-election rally.
Conclusion: Looking Ahead
Based on historical trends, it appears that the S&P 500 has a higher likelihood of rising after a midterm election year, with an average return of 16.3% in the subsequent 12 months and no negative returns since 1939.
This pattern seems to be driven by reduced policy uncertainty and favorable economic cycles post-election.