Table of Contents
Midterm elections always have the potential to introduce uncertainty to the stock market. A change in power in Congress could lead to policy and regulatory changes that may impact the economy, and the prospect of change in of itself might sway asset prices. As such, investors will be watching to see which party wins control of Congress and the implications for the stock market.
Historically, the stock market has often underperformed leading up to midterm elections and bounced back in the year following the elections. Many investors use this precedent to attempt to predict how midterms might affect the stock market in the future. However, past performance is not indicative of future results. The midterm elections may be less important for the stock market than other economic factors, such as high interest rates, inflation, and rising energy costs.
Key Points
• Midterm elections can create uncertainty in the market, but stocks have historically tended to perform well in the year following those elections.
• Investors often pay close attention to midterm elections because changes in Congress can affect tax, spending, and regulatory policies.
• While elections may influence investor sentiment, factors such as economic growth, inflation, interest rates, and corporate earnings may have a bigger impact on stock performance.
• Despite midterm election trends, historical patterns are never a guarantee of future election trends.
• Instead of making investment decisions based on election results alone, many investors focus on their long-term financial goals.
What Are the Midterm Elections?
As the name suggests, midterm elections occur in the middle of a presidential term, as opposed to a general election. Midterm elections are when voters elect every member of the House of Representatives, and about one-third of the members of the Senate. The results of the midterm elections often determine which political party controls the House and the Senate, which could determine the future of economic policy. That, in turn, may affect the stock market, and investors’ plans for buying and selling stocks or other securities.
History of Midterm Election Results
Historically, the president’s party has often lost ground in Congress during midterm elections, though that is not always the case. Of the 22 midterm elections held between 1934 and 2018, the president’s party lost an average of 28 seats in the House of Representatives and four in the Senate. The president’s party gained seats in both the House and the Senate only twice during this period.
The possible flip in power during the midterm elections may occur, in part, because presidents’ approval ratings often decline during their first two years in office, which may influence voters to vote against the party in power or not show up to the polls. Additionally, supporters of the opposition party are often more motivated to vote during these elections, boosting voter turnout and potentially helping the opposition party outperform the president’s party.
During the most recent midterm election cycle, in 2022, the Republican Party won the House of Representatives with a 222-213 seat majority. The Democratic Party maintained a majority in the Senate, with a 51-seat majority.
Stock Market Performance During Year of Midterm Elections
The stock market has historically tended to underperform, in comparison to average returns, during the time period leading up to the midterm elections. According to recent research from Fidelity Investments and Haver Analytics, since 1950, the average S&P® 500 Index market returns for the second year of a presidency is 4.9%. In contrast, the historical average return of the S&P 500 is closer to 7%, adjusted for inflation.
This pattern of underperformance during the midterm year follows the Presidential Election Cycle Theory, which suggests that the second year of a president’s term tends to be the weakest for stocks.
However, it’s unclear whether this underperformance trend and associated stock volatility in the year preceding the midterms is a direct function of investors’ views of potential election outcomes and subsequent policy changes.
Some analysts say that underperformance might occur due to the uncertainty about the election’s outcome and impact, and investors typically don’t like uncertainty. Others believe that the more critical impact on the stock market is the state of the economy, factors like the Federal Reserve’s monetary policy, energy prices, inflation, and the labor market.
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Stock Market Performance Following Midterm Elections
Even though the stock market, as measured by the S&P 500, has historically underperformed leading up to the midterm elections, stocks have frequently overperformed in the post-election environment. According to the same study by Fidelity Investments, the average S&P 500 stock market returns for the 12 months following midterm elections is 14.5%
The gains in stocks following the midterm elections generally cannot be attributed to one single factor. However, one reason may be that investors prefer the certainty of knowing the makeup of the federal government and potential policy changes. This, in turn, may provide a temporary tailwind for stocks.
How Did the 2022 Midterm Elections Affect the Stock Market?
It’s always difficult to say how any midterm election cycle will affect the stock market, and it’s important to remember the past is never a prediction of future results. However, we can look at the most recent midterm election in 2022 for some perspective. Immediately following the election, on November 8, 2022, the S&P 500 did see an increase, though it later fell in December before gaining steam again in January.,
It’s challenging to say how much the elections weighed on the markets, considering other factors. During that time, for instance, rising inflation and interest rates may have been playing a larger role in the market’s performance than other variables.
But broadly and historically, one of the ways midterm elections may impact markets is the anticipation of how results could sway economic policy and the country’s direction. For example, investors may consider how elections might influence tax policy, regulations, and spending, and whether that could impact businesses and the stock market positively or negatively.
The Takeaway
The history of midterm elections is one of cycles: The party in power may lose ground during midterm elections, while the opposition party may gain ground. These cycles may also be reflected in the performance of the stock market, with possible muted stock gains in the year of a midterm election and substantial gains the year following the elections.
But despite these historical trends, the past is never a guarantee of future elections for market performance, and no one can say for sure how the midterm elections will impact the stock market. Instead of necessarily relying on shorter-term trends when making investing decisions, many maintain a long-term view to plan for their financial goals. Key factors for long-term investors tend to include their asset allocation, risk tolerance, and the time horizon of their portfolio.
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FAQ
Do midterm elections usually affect the stock market?
Midterm elections can create uncertainty, which has the potential to create market volatility before the election. However, stocks have historically performed well in the year after midterm elections, though past performance does not guarantee future results.
Why do investors pay attention to midterm elections?
Investors watch midterm elections because the results may influence government policies on taxes, spending, and regulation. These policy changes, in turn, may affect businesses, industries, and overall market sentiment, though it’s impossible to forecast how an election may affect the economy.
Should I change my investment strategy because of a midterm election?
Making investment decisions based only on election results can be risky. Many factors affect the stock market in the shorter-term, so it is often more important to focus on your long-term goals and overall investment plan.
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S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns. In our efforts to bring you the latest updates on things that might impact your financial life, we may occasionally enter the political fray, covering candidates, bills, laws and more. Please note: SoFi does not endorse or take official positions on any candidates and the bills they may be sponsoring or proposing. We may occasionally support legislation that we believe would be beneficial to our members, and will make sure to call it out when we do. Our reporting otherwise is for informational purposes only, and shouldn’t be construed as an endorsement.
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