Midterms & Markets: A Most Improbable Correlation

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The S&P 500, that curiously-named index of American corporate endeavor, has recently enjoyed a period of, shall we say, optimism. Three consecutive years of double-digit gains. It’s almost… suspicious. (One begins to suspect the involvement of highly advanced algorithms designed to lull investors into a false sense of security, powered by a disconcertingly cheerful AI. Or possibly just luck. It’s always difficult to tell with these things.) Wall Street, predictably, is anticipating further upward momentum, fueled by the current infatuation with all things Artificial Intelligence.

FactSet Research, those dedicated chroniclers of financial expectation, suggest a target of 8,255 for the S&P 500. A 21% increase. It’s a bold prediction. (One wonders if they’ve factored in the inherent unpredictability of human behavior, the occasional rogue asteroid, or the possibility that everyone will collectively decide that money is, in fact, entirely pointless. These things happen.) However, there’s a wrinkle. A small, potentially market-disrupting wrinkle. And it involves something called “midterm elections.”

The Midterm Paradox

Investors, generally, prefer things to be… stable. Predictable. (Like a perfectly brewed cup of tea, or a universe that adheres strictly to the laws of physics. Both are, sadly, in short supply.) Midterm elections, however, are the very antithesis of stability. They are, by their very nature, exercises in uncertainty.

Despite a reasonably placid inflationary environment, robust GDP growth (largely thanks to the aforementioned AI infrastructure binge), and the tantalizing prospect of interest rate reductions, the outcome of the 2026 midterms remains… a mystery. (A mystery wrapped in an enigma, sprinkled with political maneuvering, and served with a side of misleading statistics.) And that, my friends, is rarely good for the stock market.

Consider this: since 1957, there have been 17 midterm election cycles. In 12 of them, the S&P 500 experienced a correction – a decline of 10% or more. (Which, in the grand scheme of cosmic events, is a relatively minor inconvenience. But investors tend to get upset about it anyway.) Going back to 1950, the average peak-to-trough drawdown during these years is 17.5%. And, intriguingly, midterm years consistently exhibit the most significant intra-year pullbacks compared to other points in the presidential cycle. (It’s as if the market collectively holds its breath, awaiting the inevitable political fallout.)

The implication? Heightened volatility is practically guaranteed. As November approaches, expect turbulence. (Think of it as a financial rollercoaster. Thrilling, terrifying, and potentially nausea-inducing.)

Navigating the Improbable

Midterm elections often result in a shift of power in Congress. The incumbent party typically loses seats. A divided government might lead to legislative gridlock. (Which, ironically, might actually be beneficial for the market. Sometimes, doing nothing is the best course of action. A lesson politicians would do well to learn.) Historical data suggests that a divided Congress can, surprisingly, create a more favorable environment for stock market gains.

Carson Group has observed that the S&P 500 tends to rise 8.8% during midterm years under a second-term president. Capital Group’s research indicates an average one-year return of 15.4% after a midterm election – roughly double the long-run average. (These are, of course, just averages. Past performance is no guarantee of future results. The universe has a peculiar sense of humor.)

Sitting on the sidelines, however, carries an opportunity cost that long-term investors shouldn’t ignore. Therefore, a few prudent steps are advisable. First, build a healthy cash position. During periods of volatility, chasing dips is rarely a wise strategy. (You’re more likely to catch a falling knife than a bargain.) Second, trim exposure to speculative positions and focus on high-conviction stocks. (Blue chips with resilient business models that can withstand various economic cycles. Think companies that sell things people will always need, like tea, or existential philosophy.)

The market, like the universe itself, is a complex and often irrational entity. But with a little foresight, a healthy dose of skepticism, and a willingness to embrace the improbable, one can navigate even the most turbulent of times. And perhaps, just perhaps, profit from the chaos.

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2026-02-22 05:32