Can Stocks Keep Their Post-Election Winning Streak Alive?

Midterm elections have a habit of making investors nervous, with uncertainty over taxes, spending, and regulation giving Wall Street plenty to worry about. But history suggests the months after voters head to the polls are often among the strongest for stocks, regardless of which party wins.

With the Nov. 3 elections approaching, the S&P 500 has an impressive record to defend. The index has risen in the year following every midterm since 1942, although rising bond yields and a narrow market rally could make this election cycle different.

Investors remain cautious

Finks' latest Bull & Bear reader survey shows 52.5% of respondents are bullish heading into November, up from 50.4% last month. The improvement is modest, but investors have some historical reasons for optimism.

Goldman Sachs found that the S&P 500 has delivered a median return of 0% between August and Election Day in midterm years since 1974. UBS found a similar pattern, with stocks typically weakening in the weeks leading up to October.

This year has its own complications. Megacap technology stocks have supported the major indexes, while much of the broader market has struggled to keep pace. According to The Kobeissi Letter, most S&P 500 constituents remain more than 10% below their highs.

That leaves investors facing an unusual combination of strong headline indexes and weaker performance beneath the surface.

History favors a rally

The picture improves considerably after Election Day. Raymond James found that the S&P 500 has gained in the year following all 21 midterms since 1942, averaging roughly 15%.

BlackRock's research points to a similar trend. Stocks have gained an average of 14% in the six months after midterms, compared with about 6% during comparable periods in other years.

The rally often begins around the election itself. Seasonax founder Dimitri Speck found that the index rose around Election Day in 22 of the past 23 midterm cycles, measured from five trading days before the vote to two days afterward.

The seasonal pattern extends beyond November. Carson Group data shows October has historically been the strongest month in midterm years, followed closely by November.

More remarkably, the November-to-April window known as the market’s “best six months” has delivered gains in 19 consecutive cycles after midterms since 1950, averaging nearly 15%

One explanation is that investors can finally assess the political landscape rather than speculate about it. With election uncertainty fading, attention typically returns to earnings, interest rates, and economic growth.

What happens in Washington

The Nov. 3 elections will determine control of the House and Senate, potentially changing the outlook for taxes, government spending, and regulation.

A divided Congress could limit major legislative changes, although that doesn't necessarily mean a better market. Historical figures cited in the analysis show annual stock returns averaging 8.2% under divided government, compared with 9.5% when one party controls Washington.

The policy implications also vary by sector. Healthcare, energy, financials, and technology could face different regulatory and spending priorities depending on the final makeup of Congress.

Even political gridlock carries risks. Lawmakers must address government funding beyond Dec. 12 to avoid another shutdown, keeping fiscal uncertainty on investors' radar after the votes are counted.

Why this year could differ

The biggest threat to another post-election rally may have little to do with politics.

Bank of America has warned that elevated Treasury yields could complicate the historical pattern. Higher borrowing costs can weigh on corporate profits and make expensive stocks harder to justify.

History also has exceptions to the shorter-term seasonal rally. In 2018, during the second year of President Donald Trump's first term, the S&P 500 fell 7.6% over the final two months as concerns about interest rates and economic growth intensified.

The best six months have also lost much of their edge over the rest of the year. Over the past decade, average returns during the two periods have been nearly identical, suggesting investors shouldn't rely too heavily on the calendar.

For investors, the historical record makes a case for staying invested rather than trying to predict the election outcome. Broad index funds offer a way to participate in a potential rally without betting on individual sectors or political outcomes.

The post-midterm winning streak is impressive, but earnings and interest rates will ultimately determine whether Wall Street can extend it.