# Midterm Election Years and Stocks: Historical Performance and Drawdowns

Source: https://cluenex.com/learn/markets/stocks-typically-perform-during-midterm-election/
Publisher: Cluenex (https://cluenex.com)
Updated: 2026-10-26

## Short answer

Historically, stocks deliver their weakest returns and sharpest pullbacks during midterm election years, with the S&P 500 averaging annual gains of roughly 5% to 6% and enduring an average intra-year drawdown of nearly 17%. However, once voting concludes and legislative uncertainty clears, stocks have rallied in the following 12 months in 100% of midterm cycles since 1950, averaging gains of roughly 15%.

## Key takeaways

- Midterm election years (Year 2 of the presidential cycle) historically produce below-average stock returns of 5% to 6%, compared to an average of roughly 12% in non-midterm years.
- Intra-year drawdowns during midterm years average roughly 16.8%, typically reaching a low point between August and late October as political and regulatory anxiety peaks.
- The S&P 500 has posted positive price returns in the 12 months following every midterm election since 1950, with an average forward gain of roughly 15%.
- Divided government and political gridlock have historically favored equity markets because split legislative control prevents sudden, disruptive overhauls to tax policy and regulation.
- Macroeconomic drivers like interest rates, inflation, and corporate earnings always override the political calendar, meaning election seasonality is a statistical tendency rather than a guarantee.

## How do stocks perform in midterm election years?

During midterm election years, stocks historically produce below-average gains while suffering elevated volatility. Going back to 1950, the S&P 500 has averaged a price gain of roughly 5% to 6% during midterm election years, compared to an average of more than 12% in non-midterm years.

The midterm year represents Year 2 of the four-year presidential cycle. Across modern market history, this second year has consistently ranked as the weakest of the four. Year 1 averages roughly 9% gains, Year 2 averages around 5%, Year 3 delivers roughly 16% to 17%, and Year 4 averages around 11%.

| Cycle Year | Historical Stage | Average S&P 500 Return |
| :--- | :--- | :--- | 
| **Year 1** | Post-election implementation | ~8.5% to 9% |
| **Year 2** | Midterm election campaigning and policy debates | ~5% to 6% |
| **Year 3** | Pre-presidential election year | ~15% to 17% |
| **Year 4** | Presidential election year | ~10% to 11% |

The primary reason for muted returns during the first ten months of a midterm year is headline drag. As candidates debate corporate tax changes, antitrust enforcement, health care mandates, and trade tariffs, corporate leadership often delays major capital expenditures. Investors demand a higher risk premium to hold equities when government rules might shift. That caution keeps valuations compressed until the ballots are cast.

## Why are intra-year drawdowns so steep before midterms?

Intra-year drawdowns in midterm election years are substantially deeper than in normal market years, averaging a peak-to-trough drop of roughly 16.8% across cycles since 1980.

In a standard calendar year, the S&P 500 typically pulls back by roughly 13% to 14% at some point between January and December. In midterm years, however, that dip regularly deepens into correction territory. Data from Hartford Funds and Capital Group shows that over the ten midterm cycles between 1986 and 2022, the average intra-year decline was 16.8%. In acute macro cycles such as 2002 and 2022, those midterm drawdowns reached 33.8% and 25.4% respectively.

These pullbacks usually bottom late in the summer or early in the fall. The average calendar date for a midterm market low is in late September or early October. Between primary campaigns in the spring and final debates in October, political rhetoric reaches its peak. Investors frequently misinterpret campaign promises as imminent statutory laws, sparking waves of risk aversion. You can read more about measuring these pullbacks in our guide on [drawdowns and maximum drawdown](/learn/portfolio-management/drawdown-maximum-drawdown/).

## How does the market respond once the election is over?

Equities historically stage powerful rallies immediately after midterm voting, regardless of which political party wins majority control.

According to data from CFRA Research, Fidelity, and J.P. Morgan, the S&P 500 has gained ground in the 12 months following every single midterm election since 1950. Across those cycles, the average gain over the subsequent twelve-month window sits near 15%. When measured directly from the intra-year autumn low to the subsequent year's high, Hartford Funds data shows the average advance exceeds 27%.

This rebound happens because markets dislike ambiguity far more than they dislike unfavorable party platforms. Going into an election, investors must price in worst-case scenarios for regulatory crackdowns and tax hikes across dozens of competitive congressional districts. Once the polls close, the composition of the Senate and House is settled. Analysts can update cash flow projections with known legislative constraints. Implied volatility in options markets collapses, prompting institutional portfolios to re-enter risk assets.

## Does policy gridlock help or hurt the S&P 500?

Political gridlock historically helps stock prices because a divided Congress prevents abrupt statutory shifts that damage corporate profits.

Gridlock occurs when the presidency, the Senate, and the House of Representatives are not all controlled by the same party. Midterm elections frequently result in the sitting president's party losing seats in Congress. Historical studies from RBC Capital Markets and Fidelity show that annualized returns for the S&P 500 are slightly higher under a divided government than under unified party control.

A unified government can pass sweeping tax revisions, new corporate levies, or industry-specific regulations on a party-line vote. In contrast, divided control creates legislative inertia. Neither party can easily overhaul the tax code or enact burdensome compliance rules without bipartisan consensus. For equity investors, a government that cannot pass sweeping laws offers stability, allowing corporate management teams to invest capital with confidence that rules will not shift overnight.

While politicians may actively adjust their personal portfolios ahead of committee votes, institutional capital focuses primarily on the broad regulatory backdrop. Research tools like [Cluenex](/learn/compare/) track real-time congressional disclosures, which show that filings often reach the public with a 23 (Cluenex data, https://cluenex.com/learn/data/congress-trading/), proving that copying political trades is far less practical than tracking corporate balance sheets.

## When does the midterm election pattern fail?

Midterm election seasonality fails whenever major macroeconomic forces overwhelm political cycles.

Historical cycles reflect averages, not ironclad laws. An election calendar does not override central bank monetary policy, inflation shocks, or sudden corporate earnings collapses. Investors who rely purely on election seasonality run into three common traps:

1. **Severe recessions and systemic shocks:** In 2008, the S&P 500 fell more than 38% due to the global financial crisis, ignoring typical presidential cycle tendencies. Similarly, stagflation in 1974 pushed stocks sharply lower regardless of election dates.
2. **Monetary policy tightening:** In 2022, midterm season coincided with rapid interest rate hikes from the Federal Reserve to combat 40-year-high inflation. The S&P 500 suffered a 25.4% intra-year drawdown and ended 2022 down over 18%, because borrowing costs mattered far more than congressional ballots.
3. **Front-running the seasonal trade:** In some midterm years, stocks rally early instead of dropping. Through August 2026, the S&P 500 posted double-digit gains fueled by artificial intelligence infrastructure spending, defying the historical tendency for a sluggish start. When equities do not drop into October, the post-election rally can be muted because no valuation discount was created.

Corporate financial health is what truly underpins equity performance over time. While headlines swirl around Washington, the S&P 500 75% (Cluenex data, https://cluenex.com/learn/data/earnings-beat-rate/), proving that revenue and cash flow drive returns far more than ballot results.

## What this means for you

If you manage your own investment portfolio with a brokerage account, midterm election years require steady execution rather than political prediction. You can apply three practical rules to navigate this period:

- **Never liquidate your portfolio based on election fears:** Moving to cash to avoid election volatility is one of the costliest mistakes a self-directed investor can make. Because the S&P 500 has risen in the 12 months following every midterm election since 1950, investors who step out often miss the sharpest phase of the recovery.
- **Use autumn pullbacks as buying opportunities:** If headline anxiety pushes high-quality stocks down during August, September, or October, treat the dip as normal midterm price behavior. Utilizing a [dollar-cost averaging](/learn/portfolio-management/dollar-cost-averaging/) approach lets you build positions at lower valuations without attempting to guess the exact day of the bottom.
- **Filter companies by fundamental durability:** Avoid judging a business by which political party is leading in the polls. Focus instead on balance sheet strength, operating margins, and competitive advantages that endure regardless of who chairs congressional committees. On individual stock pages, [Cluenex](https://cluenex.com/glossary/) scores business quality on a 0 to 10 scale across profitability, moat, growth, and financial health against industry peers, helping you evaluate operational resilience instead of political noise.

## Questions people ask

### Why is the third year of the presidential cycle usually the strongest for stocks?

The third year of the presidential cycle historically leads all four years with average gains near 16% because the post-midterm rally gains momentum. Additionally, incumbent administrations frequently focus on voter-friendly, growth-oriented policies ahead of the upcoming presidential race.

### Which sectors are most sensitive to midterm election outcomes?

Health care, defense, energy, and financial services tend to experience the highest volatility leading into midterm elections. These industries are heavily regulated, making their profit margins sensitive to statutory shifts in pricing power, defense appropriations, tax incentives, and regulatory compliance.

### Should I move my money into cash before a midterm election?

No, moving to cash ahead of midterm elections has historically hurt long-term returns because stocks have gained ground in the 12 months following every midterm vote since 1950. Market recoveries often begin right around Election Day, making timing the re-entry point extremely difficult.

### Does it matter to the stock market which political party wins the midterms?

Historical returns show little difference in large-cap stock performance based on whether Democrats or Republicans win congressional majorities. The market responds far more to the resolution of policy uncertainty and the presence of legislative gridlock than to specific party platforms.

## Sources

- [How might midterm elections impact the stock market?](https://www.fidelity.com/learning-center/trading-investing/midterm-elections-and-the-stock-market)
- [When Stocks Stumble in Midterm Years, What Comes Next?](https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/when-stocks-stumble-in-midterm-years-what-comes-next.html)
- [How do markets perform post-midterms?](https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/how-do-markets-perform-post-midterms/)

Cite as: Cluenex. "Midterm Election Years and Stocks: Historical Performance and Drawdowns." Cluenex Learn, updated Oct 26, 2026. https://cluenex.com/learn/markets/stocks-typically-perform-during-midterm-election/