History suggests that stock market performance has varied meaningfully across the four-year presidential cycle. As the chart below, provided by Fidelity Investments, illustrates, the second year of a presidency (midterm year) has historically produced the weakest average return at 3.4%. Midterm years often bring heightened uncertainty as investors assess potential changes – and if we know anything about the stock market, we know that it does not like uncertainty.
Sources: US BUREAU OF LABOR STATISTICS
However, the period following the midterm election has historically been much stronger. Year three of the presidential cycle has generated an average return of 14.7%, the highest of the four years shown. One possible explanation is that election-related uncertainty begins to fade, while elected officials may focus on policies intended to support economic growth ahead of the next presidential election. Historically, it really doesn’t matter how the midterm election goes - Democratic sweep, Republican sweep, split Congress. Regardless of the outcome, the following year the S&P 500 returns, on average, anywhere between 10% and 15% and is positive roughly 88% of the time according to Sofi.The broader lesson is not that investors should attempt to time the market around elections. Although historical patterns can provide useful context, each market cycle is shaped by different economic conditions, including inflation, interest rates, corporate earnings, and geopolitical events.
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