Key Points
One of the most reliable predictors of stock market performance over nearly nine decades isn’t a complex valuation metric such as the Shiller CAPE ratio or the Buffett indicator, nor is it a sophisticated macroeconomic forecast or interest‑rate model. Instead, it’s the outcome of the midterm elections.
Fidelity’s research shows that the S&P 500 (SNPINDEX: ^GSPC) has delivered positive returns in the year following a midterm election 95% of the time since 1938. This pattern holds regardless of which party gains control or whether incumbents or challengers win more seats. The likely explanation is that the political uncertainty preceding the election dissipates once the votes are counted.
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Markets typically aversion to uncertainty leads to a “shoot‑first, ask‑later” reaction to major events. Consequently, once the election‑related uncertainty clears, equities often rally. In fact, not only have stocks risen in 95% of the November‑to‑November periods after midterms since 1938, but this stretch also tends to deliver the strongest returns of the presidential cycle. Since 1950, the third year of a presidential term—which follows the midterms—has produced an average annual gain of 14.5%.
By contrast, the fourth year posts a more modest 9.1% average rise with a 72% probability of an up year, yet it is also the most volatile, showing both large gains and sharp declines. The second year of the cycle is generally the weakest, averaging just a 4.9% increase and a 55% chance of a positive 12‑month return. Historically, the September preceding the midterms has been especially challenging: Cantor Fitzgerald notes that the market fell by 5% or more in September during 15 of the last 24 midterm election years dating back to 1930.
Nevertheless, Carson Group observes that October and November have been the best months for stocks during midterm election years since 1950, posting average gains of 3.0% and 2.7% respectively. UBS adds that, from the end of September through year‑end, the market typically rallies about 6% during those years.
How should investors prepare?
First, it’s important to remember that historical patterns do not guarantee future results. Although the trend is clear, the sample size remains relatively small from a statistical perspective.
That said, given this tendency and the current bull market, staying invested makes sense. While there is considerable chatter about an AI bubble and a possible market correction, now is not the time to stay on the sidelines. Valuation gauges such as the CAPE ratio and the Buffett indicator may flag the S&P 500 as pricey, but the index’s composition has shifted dramatically.
Whereas the index once leaned heavily on cyclical industrials, energy firms, and financials, today it is dominated by large‑cap technology companies that feature less cyclical business models, strong operating cash flow, solid balance sheets, and promising growth prospects. In addition, artificial intelligence (AI) has reshaped the landscape, accelerating the innovation curve so that new technologies emerge faster than ever. Unlike earlier tech waves—personal computers, the internet, smartphones—AI’s expansion is not constrained by human adoption rates; its potential is virtually limitless.
For these reasons, allocating to broad‑market ETFs such as the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Invesco QQQ Trust (NASDAQ: QQQ)—which mirrors the tech‑heavy Nasdaq‑100 index—offers a straightforward core holding. These funds provide instant diversification and can be complemented with select growth‑oriented stocks.
With September drawing to a close, the present moment looks opportune for entering the market.
