How do markets typically perform following midterm elections?

Midterm elections are fast-approaching, and although the Republicans appear poised to assume a majority in the House of Representatives, the race for the Senate looks like it may come down to the wire. A lot can still happen before election day on November 8, but history suggests that just getting past the election could be a positive catalyst for the equity market.

First is the simple fact that one meaningful source of uncertainty will be behind us. Markets tend to dislike policy uncertainty, as evidenced by Year 2 (midterms) and Year 4 (presidential election) of the U.S. election cycle. In those years, average returns have been lower and the range of outcomes wider, suggestive of greater volatility. Once election uncertainty clears, markets have typically responded positively, particularly following midterms. Since 1949, Year 3 of the election cycle has not only posted the highest average return but has also never experienced a significant down year for stocks.

Secondly, a split Congress has typically corresponded to stronger average returns for equities — most likely due to the natural checks and balances that limits sweeping policy changes. If recent polls hold, the probability of split control of Congress over the next two years appears high.

Finally, there’s the simple acknowledgment that investing in stocks over the long term has paid off. The average return for stocks has been positive in each year of the four-year election cycle. As we discuss in our accompanying piece, equity markets tend to rise over time, regardless of the political climate or party control.

Moving past the election won’t resolve all the sources of uncertainty facing the markets, but it will eliminate one. History suggests that should be good news for investors.