As the market sweats ahead of the midterm elections, this event historically heralds strong stock performance, whether it’s a red wave or a green wave, a split decision or a status quo in Washington.
of S&P500 They tend to perform well in both midterm and presidential elections. A CNBC analysis of post-election S&P 500 returns from 1980 to 2024 found that for both presidential and midterm elections, the index rose an average of 0.2% after the day and week, and 1.1% after the month.
A year later, the index rose an average of 13.7% after midterm elections and 13.8% after presidential elections. Returns were positive in 91% of cases. And the S&P 500 rose in all 11 interim periods from 1982 to 2022.
Short-term returns are unreliable, especially after the presidential election, where the average one-day and one-week returns were slightly negative.
“There’s some uncertainty before the election,” Ryan Detrick, CNBC contributor and chief market strategist at The Carson Group, told CNBC. “Once we get through that, there’s a lot of relief and the market tends to do pretty well.”
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Still, markets typically favor divided government, with one party in charge of the White House and the other party controlling at least one house of Congress.
During 10 midterm elections and five presidential elections in which no single party was in power, the S&P 500 index rose an average of 15% a year later. The one-year return was positive in 14 out of 15 cases. By contrast, the index rose by an average of 11.5% in the year following a single-party election.
“When you have a big red wave or a big blue wave, the market actually doesn’t like it very much because there’s too much spending in one direction and too much power,” Detrick said.
It was also positive that Democrats would retain control of Congress and Republicans would remain in the White House, a scenario that may emerge from Tuesday’s election. According to a CNBC analysis, since three midterm elections (1986, 1990 and 2006) in which Democrats held both chambers of Congress and a Republican was president, the S&P 500 index fell an average of 0.5% on the day of the reaction, but rose 3.4% a month later and 10.9% a year later.
Indeed, elections may be a coincidence with factors that are far more important to market performance.
The S&P 500 plummeted 22.1% in the year after the 2000 election due to the dot-com bust, marking its worst post-election performance since 1980. Conversely, the S&P 500’s best post-election year was a 38.3% post-election gain in 2020, when the market made a massive recovery from the coronavirus-induced decline.
Investors should keep in mind that Federal Reserve policy and corporate earnings cycles ultimately matter more than elections, Société Générale said.
For example, stock prices fell in the aftermath of the 2018 midterm elections, in which Democrats took control of the House of Representatives during President Donald Trump’s first term. More importantly, as the Fed tightened monetary policy that year and raised interest rates four times, the S&P 500 ended the year down 6.2%, even though the market was up 11.7% in the year after the election.
The big variable now is whether the decline of AI and technology will continue. As long as the AI wave continues to advance and the economy continues to grow, “this bull market is probably still alive and well,” Detrick said.
But if Democrats win the House and Senate, it will almost certainly put pressure on AI infrastructure and could lead to further layoffs.
Bond markets are also volatile, with rising yields globally and a small debt crisis in France. And if President Trump carries out his threat of additional attacks or if Iran escalates, the war with Iran could get even worse after the election.
“Seasonality is not destiny. Concerns around Iran, AI and France are not going to magically disappear,” Jim Reid, global head of macro thematic research at Deutsche Bank, said in a note.
If history is any guide, there could be a Santa rally after the midterm elections, and the S&P 500 could rise. But this is still an AI-driven market, with geopolitics, the Fed, and bond markets largely responsible.
—CNBC’s Chris Hayes contributed reporting.
