The market exits before the midterm elections, but these events historically spell strong performance for stocks – regardless of red or blue waves, split decisions, or the status quo in Washington.
At S&P 500 tend to perform well after midterm and presidential elections. According to a CNBC analysis of S&P 500 post-election returns from 1980 to 2024, the index rose an average of 0.2% after a day and a week, and 1.1% after a month in presidential and midterm elections.
A year later, the index gained an average of 13.7% after the midterms and 13.8% after the presidential election. The answer is positive in 91% of cases. And the S&P 500 rose after all 11 midterms from 1982 to 2022.
Short-term returns are less reliable, especially after the presidential contest, which has slightly negative average returns after one day and one week.
“There was some anxiety before this election,” Ryan Detrick, CNBC contributor and chief market strategist at the Carson Group, told CNBC. “Once you get through, it’s a big relief and the market tends to do pretty well.”
The market prefers to be stuck
However, markets usually prefer a divided government: one party is in charge of the White House and the other holds at least one house of Congress.
During the 10 midterm elections and five presidential elections in which no party was in charge, the S&P 500 rose an average of 15% after one year. One-year returns were positive in 14 out of 15 cases. By comparison, the index gained an average of 11.5% in the year following an election that resulted in single-party control.
“When you have a big red wave or a big blue wave, the market really doesn’t like it because you’re spending too much and too much power,” Detrick said.
Leaving Democrats in control of Congress with Republicans in the White House — a scenario that may emerge from Tuesday’s election — is also positive. A CNBC analysis found that after three midterms (1986, 1990 and 2006) when Democrats controlled both houses and Republicans held the presidency, the S&P 500 averaged a 0.5% drop on the reaction day but rose 3.4% a month later and 10.9% a year later.
Of course, elections can be events that coincide with more important factors for market performance.
The S&P 500 fell 22.1% in the year after the 2000 election due to the dotcom bust, marking its worst post-election performance since 1980. Conversely, the S&P 500’s best post-election year was a 38.3% gain after the 2020 election, when markets rebounded from COVID-19.
Investors should remember that Federal Reserve policy and corporate earnings cycles are ultimately more important than elections, according to Société Générale.
Stocks declined after the 2018 midterms, for example, when Democrats seized control of the House during President Donald Trump’s first term. More importantly, the Fed tightened monetary policy that year, raising interest rates four times, and the S&P 500 ended the year down 6.2%, even though the market was up 11.7% a year after the election.
The big swing factor right now is AI and whether the decline in technology will continue. As long as the AI wave is still moving and the economy continues to grow, “this bull market is probably alive and well,” Detrick said.
But a Democratic sweep of the House and Senate will almost certainly force the development of AI infrastructure and could lead to more retrenchment.
The bond market was also buoyed by global rising yields and a mini-debt crisis in France. And the war with Iran could get worse after the election if President Trump follows through on threats of another attack or Iran escalates.
“Seasons are not destiny, and worries over Iran, AI and France will not disappear mysteriously,” Jim Reid, Deutsche Bank’s head of global macro and thematic research, said in a note.
If history is any guide, we could see a Santa rally and S&P 500 gains after the midterms. But this is still an AI-driven market, with geopolitics, the Fed, and the bond market very much in charge.
– CNBC’s Chris Hayes contribute reports.