Throughout recent years, the S&P 500 index, which aggregates roughly 500 major publicly traded companies in the United States, has witnessed strong returns. After a period of modest turbulence earlier in the year, the index closed with a 16% gain, marking its third consecutive year of double-digit growth (23% in 2024 and 24% in 2023).
Despite this positive momentum, questions remain about the index's trajectory over the near term, especially considering a significant political event on the American horizon: the midterm elections scheduled for November 2026. Historical perspectives shed light on how the S&P 500 typically behaves during this phase and what factors may influence performance.
Historical Volatility Prior to Midterm Elections
Looking back through multiple midterm election cycles since 1926, the S&P 500 has tended to experience significant declines in the 12 months before these elections. Analyzing the index's largest drawdown—which measures the maximum percentage drop from peak to trough—provides a clear indication of market vulnerability during these times.
| Midterm Date | Largest Drawdown Before Midterm |
|---|---|
| Nov. 8, 2022 | (25.4%) |
| Nov. 6, 2018 | (10.2%) |
| Nov. 4, 2014 | (7.4%) |
| Nov. 2, 2010 | (16%) |
| Nov. 7, 2006 | (7.7%) |
| Nov. 5, 2002 | (33.8%) |
| Nov. 3, 1998 | (19.3%) |
| Nov. 8, 1994 | (8.9%) |
| Nov. 6, 1990 | (19.9%) |
| Nov. 4, 1986 | (9.4%) |
| Nov. 2, 1982 | (18.9%) |
| Nov. 7, 1978 | (12.9%) |
| Nov. 5, 1974 | (41.8%) |
| Nov. 3, 1970 | (29.5%) |
| Nov. 8, 1966 | (22.2%) |
| Nov. 6, 1962 | (28%) |
| Nov. 4, 1958 | (5.6%) |
| Nov. 2, 1954 | (4.4%) |
| Nov. 7, 1950 | (14%) |
| Nov. 5, 1946 | (26.6%) |
| Nov. 3, 1942 | (20.5%) |
| Nov. 8, 1938 | (28.9%) |
| Nov. 6, 1934 | (29.3%) |
| Nov. 4, 1930 | (34.8%) |
| Nov. 2, 1926 | (9.4%) |
Upon review, the pattern of significant pre-midterm declines appears consistently across decades, underscoring the relevance of this seasonal historical phenomenon. While a few exceptions might be coincidental, the overall trend merits attention from investors and market watchers alike.
Exploring Drivers Behind Midterm Election Drawdowns
The downward swings ahead of midterm elections generally originate from a combination of factors rather than a single cause. Chief among these is the uncertainty generated by the potential changes in political leadership and policy direction that midterms represent.
During the midterms, control of Congress and other political bodies may shift, leading to modifications in legislation that can impact various economic sectors. Tax policies, regulations affecting specific industries, governmental fiscal priorities, and international trade rules are all subject to amendment, depending on election outcomes.
This anticipated volatility in policy introduces a variable element in corporate planning and investment decisions. Consequently, shareholders frequently opt to reduce exposure or adopt a wait-and-see approach, leading to market pullbacks. Some investors prefer to lock in gains made earlier in the cycle to avoid facing undesirable losses should a correction occur.
Post-Election Market Responses and Investor Considerations
Though uncertainty tends to depress markets before elections, empirical data suggest that the S&P 500 often rebounds strongly once the election results are settled. Historical averages from previous midterm cycles indicate the following returns:
- Approximately 5.8% gain three months following midterm elections
- About 10.5% appreciation six months afterwards
- A more substantial 14.8% rise over the span of a year post-election
These figures highlight a tendency for markets to recover and generate meaningful gains relatively soon after midterm resolutions, reflecting reduced uncertainty and clearer policy direction.
However, it is crucial to underscore the challenges inherent in market timing. Attempts to sell stocks ahead of the midterms with plans to re-enter at lower prices appear risky and speculative. Making investment decisions based on timing predictions rather than fundamentals aligns more closely with gambling than disciplined portfolio management.
Investors are therefore advised to maintain consistency in their strategies. Should a market downturn materialize in anticipation of the midterms, it can present an opportunity to acquire shares at relatively lower valuations. In the long term, sustained participation in the market typically outperforms short-term timing maneuvers.
Conclusion
While historical data demonstrate that the S&P 500 usually experiences significant drawdowns in the year leading up to midterm elections, these are often followed by substantial gains after the political outcomes become clear. Investors should be aware of this cyclical pattern but avoid reactive selling that attempts to predict market bottoms. Persistence and measured investment are key in navigating these periods of volatility.