Markets are sweating as the midterm elections approach, but this event historically heralds strong performance for stocks, whether it’s a red or blue wave, a split decision or business as usual in Washington.
THE S&P500 tends to do well after midterm and presidential elections. According to a CNBC analysis of S&P 500 returns after elections from 1980 to 2024, the index rose an average of 0.2% after one day and one week, and 1.1% after one month during presidential and midterm elections.
A year later, the index gained an average of 13.7% after the midterm elections and 13.8% after the presidential elections. The feedback was positive in 91% of cases. And the S&P 500 was up after all 11 half-years from 1982 to 2022.
Short-term returns were less reliable, particularly after the presidential elections, which produced slightly negative average returns after one day and one week.
“There is some anxiety leading up to this election,” Ryan Detrick, CNBC contributor and chief market strategist at Carson Group, told CNBC. “Once you get through it, it’s a big relief and the markets tend to do pretty well.”
Markets prefer deadlock
Yet the market generally prefers divided government: one party controls the White House and the other holds at least one chamber of Congress.
During ten midterm elections and five presidential elections that left no party in power, the S&P 500 index rose an average of 15% after one year. One-year returns were positive in 14 out of 15 cases. For comparison, the index gained an average of 11.5% over the year following elections that resulted in single-party control.
“If you have a huge red wave or a big blue wave, the markets don’t really like that because there’s too much spending one way and too much power,” Detrick said.
Leaving Democrats in control of Congress with a Republican in the White House – a scenario that could emerge from Tuesday’s elections – was also positive. A CNBC analysis found that after the three midterms (1986, 1990 and 2006), when Democrats controlled both chambers and a Republican held the presidency, the S&P 500 fell an average of 0.5% on the day of the reaction, but rose 3.4% a month later and 10.9% after a year.
Of course, elections can coincide with much more important factors for market performance.
The S&P 500 plunged 22.1% in the year after the 2000 election due to the collapse of the dot-com bubble, marking the worst post-election performance since 1980. Conversely, the S&P 500’s best post-election year was a 38.3% gain after the 2020 election, when markets made a massive comeback after the S&P 500-induced sell-off. COVID.
Investors should keep in mind that Federal Reserve policy and the corporate earnings cycle ultimately matter more than elections, according to Société Générale.
Stocks fell in the aftermath of the 2018 midterm elections, for example, when Democrats took control of the House during President Donald Trump’s first term. More importantly, the Fed tightened monetary policy that year, raising interest rates four times, and the S&P 500 ended the year down 6.2%, while the market was up 11.7% a year after the election.
The main driver of evolution is now AI and continued technological decline. As long as the AI wave continues and the economy continues to grow, “this bull market is probably still alive and well,” Detrick says.
But a Democratic victory in the House and Senate would almost certainly put pressure on AI infrastructure development and could lead to more workforce reductions.
The bond market is also nervous with rising yields globally and a mini debt crisis in France. And the war with Iran could escalate after the election if President Trump follows through on his threats of more strikes or if Iran escalates.
“Seasonality is not inevitable, and concerns about Iran, AI and France will not mysteriously disappear,” Jim Reid, global head of macroeconomic and thematic research at Deutsche Bank, said in a note.
If history is any guide, we could see a Santa rally and S&P 500 gains after the midterms. But it’s still an AI-driven market, with geopolitics, the Fed, and the bond market in the driver’s seat.
—CNBC Chris Hayes reports contributed.
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