Midterms & Markets: Average Stock Market Returns Following Midterm Elections

Not to spoil the ending, but midterms are typically a tailwind for the stock market — a sigh of relief from election uncertainty. But which party is better for the market? And how about average returns? Get all that and more below!

Justin Nugent

This article was last updated on 11/07/2022.

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Midterm elections are less than 48 hours away, and the results are likely to impact the stock market — but maybe not in the way you might think. Below, get answers to the following questions: What usually happens to the stock market after midterm elections? Do stocks usually go up after midterms? If so, by how much do stocks go up after midterms? And which party is it better for market? Republicans, Democrats, or something in between? 

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Do Stocks Usually Go Up After Midterms?

Short answer: Yes. 

Here are a few statistics that might help bulls get some rest after a tumultuous year.

  • Since 1946, there have been 19 midterm election cycles. When comparing the 6-month period preceding midterms, with the 6-month period directly following midterms, the post-midterm period outperformed the pre-midterm period 89% of the time (17/19).
  • Since 1950, the average S&P 500 return in the 12-months following midterm elections is +15%.
    • Additionally, none of those 12-month periods following midterm elections have resulted in negative returns!
  • In the same period (1950-present), the average quarterly S&P 500 return on midterm election years has been:
    • Q1: -1%
    • Q2: +2%
    • Q3: +5%
    • Q4: +8%

Here’s the caveat: 2022 wasn’t a normal year by any measure! The S&P 500 thus far has fallen from all-time highs into a painful bear market. In the first quarter, the S&P fell by -4.6%. In the second quarter, an even worse -16.4%. And in the third quarter? Yet another drop, this time of -4.9%. 

In total, the S&P 500 lost a ¼ of its value during the first three quarters of 2022. With less than two months to spare, could midterms be the turnaround catalyst that the market needs? It very well could. But there’s one outcome that will help it get there more than any other.

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Are Republicans Better For the Stock Market? Democrats? Something Else?

Short answer: Something else.

As you wait for the poll results to roll in, unclench those fists. Take a deep breath. Relax. You already know that historically speaking, the market is generally upbeat no matter who wins. The truth is that the stock market doesn’t hate any particular party — it hates uncertainty. 

You know, like the period that precedes midterm elections, where both parties are trying to make it seem as though the world will end if the other party gets elected — that type of uncertainty. When that ends, the market usually rallies regardless of which party comes out on top.

Still, there’s some nuance to this. The stock market does tend to prefer a Republican-controlled Congress to a Democrat-controlled Congress. Under Republicans, the stock market has typically risen 13.4% annually versus 10.7% under Democrats (since 1950). 

However, the one outcome that firmly beats both Republican and Democrat victories: A split Congress

As we described above, the market likes predictability, not uncertainty. When Congress is split, there are often fewer bills passed as political gridlock sets in, and both sides vie for positioning. This means a more consistent, stable outlook for the market — and that’s generally the most positive outcome, with an average annual S&P return of 17.2% during years where Congress is split between the two parties (since 1950). 

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History Favors Bulls Following Midterms (But You Must Remain Disciplined)

It’s true. If you’re specifically a “data trader,” then you have to be long following the midterm elections. The end of the year is already a seasonally strong period, especially when the preceding months have been highly bearish (which certainly has been the case in 2022). The statistics above add fuel to that rocketship — an average Q4 return of +8% during midterm years (that’s pretty big), an average 12-month return following midterm elections of +15% (that’s even bigger), and an 89% occurrence of at least a better post-midterm than pre-midterm period. 

But there’s a catch: 2022 sucks. There’s no flowery way to say it — bulls haven’t had a great time this year. Abroad, global geopolitical tensions are boiling as the deadliest conflict since World War 2 rages on in Ukraine. At home, that isn’t helping inflation, which rests at a 40-year high. Despite soaring costs, rampant government spending continues. To top it all off, the Fed is raising interest rates at record pace, while simultaneously shrinking the balance sheet. All of these headwinds add up to create a unique macro environment, to say the least. 

Put it all together — what does it all mean? Be careful, but don’t run scared. With a plan, and some discipline, you can navigate this post-midterm environment. And if you ever need any help coming up with trade ideas, Market Rebellion’s got you covered. Sometimes, these articles have free trade ideas built in. Even better — Jon and Pete Najarian are on the Rebel Hub almost every day giving out unusual options activity alongside their unfiltered take on real-time market news. Access their free shows by clicking the banner below! 

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