With the United States on edge awaiting the midterm election results, there's a historical pattern that might offer some comfort. The S&P 500 has often shown gains after elections, regardless of which party comes out on top. An analysis of its performance from 1980 through 2024 reveals a trend: after both midterm and presidential elections, the index typically climbs, averaging a rise of 13.7% and 13.8% respectively in the following year.
Historically, the S&P 500 has posted positive returns in 91% of cases one year after elections. All 11 midterms since 1982 have resulted in gains. But the short-term picture is murkier. After presidential elections, the index has sometimes dipped slightly right after the results.
Market strategist Ryan Detrick points out that while pre-election jitters are common, markets tend to perform better once the dust settles. He notes that markets generally prefer a divided government, where one party holds the White House and the other controls at least one chamber of Congress. In such cases, the S&P 500 has averaged a 15% rise after a year, with 14 out of 15 instances showing gains.
On the other hand, when one party controls both branches, the index has risen by an average of 11.5% over the year following the election. Detrick suggests markets are cautious about significant power shifts, fearing potential excess spending and power consolidation.
Should the Democrats keep Congress while a Republican sits in the White House, historical data points to a likely positive outcome for the S&P 500. In the three midterms with this setup (1986, 1990, and 2006), the index saw a slight 0.5% dip post-election day but bounced back with a 3.4% gain after a month and a 10.9% rise after a year.
Factors Beyond Elections
While elections sway market sentiment, other factors often play a more decisive role in shaping market performance. The worst post-election year for the S&P 500 was 2000, with a 22.1% drop blamed on the dotcom crash. On the flip side, the best year followed the 2020 elections, with a 38.3% surge as markets rebounded from the COVID-19 downturn.
Federal Reserve policies and corporate earnings cycles are often more influential on market outcomes than election results. For instance, despite Democrats taking the House in the 2018 midterms, the S&P 500 ended the year down 6.2% due to the Fed hiking interest rates four times. Yet a year later, the index had risen by 11.7%.
Currently, the trajectory of artificial intelligence and its impact on tech stocks is a major consideration for investors. Detrick believes that as long as AI advances and the economy grows, the bull market will thrive. However, a Democratic sweep of Congress might slow AI infrastructure development, potentially leading to market pullbacks.
Other concerns loom, including rising global bond yields and geopolitical tensions. Deutsche Bank's Jim Reid cautions that these issues, along with AI and bond market dynamics, will continue to affect market conditions after the election.
Despite these challenges, historical patterns suggest a possible Santa rally and further S&P 500 gains post-midterms. Yet investors must stay alert to the broader economic and geopolitical landscape, which will ultimately dictate market performance.
