Midterms

Published On: January 21, 2026

Written by: Ben Atwater and Matt Malick

Investors analyze the stock market through various lenses. Fundamental analysis
examines company health via earnings, revenue, and debt. Valuation metrics, such as
the price-to-earnings ratio, help determine if a stock costs too much or too little.
Technical analysis uses price charts and volume patterns to find trends. And sentiment
analysis gauges the mood of the crowd through fear and greed indicators.

Success in the stock market requires patience because timing the market remains
impossible. No one can consistently predict the future. Countless factors influence price
movements every second. History shows countless unexpected events, making markets
unpredictable.

In 1987, the “Black Monday” crash saw the Dow Jones Industrial Average drop 22.6% in
a single day without a clear warning. The 2010 “Flash Crash” wiped out 1,000 points in
minutes due to algorithmic trading glitches. More recently, the 2020 pandemic triggered
a rapid collapse and an equally fast recovery that defied expectations. These events
prove that the market ignores even the best forecasts.

However, historical data reveals certain patterns within election cycles. Politics and
policy shifts impact investor behavior. The four-year presidential cycle often follows a
specific rhythm. For the above reasons though, whether this year follows or not is
anyone’s guess.

The second year of the presidential term, known as the midterm year, typically produces
the lowest returns and the highest stress. Historically, the S&P 500 underperforms
during the first ten months of these years. Investors dislike the uncertainty of shifting
power in Congress, and the general rhetorical ugliness of a midterm dampens spirits.

Midterm years often feature significant price swings. Data shows that the average intra-year
decline during midterm years reaches 19%. This drawdown exceeds the average
drops seen in other years. The market often essentially “resets” as it digests potential
governmental changes. As recently as 2022, a mid-term election year, the stock market
fell 19.4%, while bonds happened to suffer a similar fate.

Despite this turbulence, a notable trend exists: the market historically rallies after the
midterm elections. Since 1942, the S&P 500 has never finished lower twelve months
after a midterm election. The resolution of political uncertainty acts as a catalyst for
growth. While the path through a midterm year feels rocky, its conclusion often leads
into the strongest year of the four-year cycle.

Interestingly, markets perform better under divided government than unified
government. In other words, if Congress and the President are led by different parties,
the stock market performs, on average, 3% per year better.

Investors should view these cycles as a framework rather than a guarantee. While
midterm years bring volatility, they also provide historical context for temporary price
drops.

Discipline remains the most effective tool for long-term wealth management. Focus on
your goals rather than the headlines of the day because despite these interesting
historical trends, markets are impossible to predict.