Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 450

Five charts show investors should care about US midterm elections

Although there are more than seven months to go, US midterm elections are already top of mind for politicians. And with good reason. Capital Group believes 2022 could be one of the more consequential midterm elections in US history. Every move in Washington right now is being carefully calculated with the midterms in mind.

But while control of Congress may be at stake, do midterm elections have any effect on US equity markets?

To find out, we examined more than 90 years of data and found that the answer is yes, markets have behaved differently during midterm election years. Here are the five key lessons about investing in this political cycle.

1. The president’s party typically loses seats in Congress

Source: The American Presidency Project, "Seats in Congress Gained/Lost by the President's Party in Mid-Term Elections.”

Midterm elections occur at the midpoint of a four-year presidential term and usually result in the president’s party losing ground in Congress. Over the past 22 midterm elections, the president's party has lost an average 28 seats in the House of Representatives and four in the Senate. Only twice has the president’s party gained seats in both chambers.

Why is this usually the case? First, supporters of the party not in power usually are more motivated to boost voter turnout. Also, the president’s approval rating typically dips during the first two years in office, which can influence swing voters and frustrated constituents to seek change.

Since losing seats is so common, it’s usually priced into the markets early in the year. But the extent of a political power shift and the resulting policy impacts remain uncertain until later in the year, which can explain some of the other trends we’ve uncovered.

2. US market returns tend to be muted until later in midterm years

Sources: Capital Group, RIMES, Standard & Poor’s. The chart shows the average trajectory of equity returns throughout midterm election years compared to non-midterm election years. Each point on the lines represents the average year-to-date return as of that particular month and day and is calculated using daily price returns from 1/1/31–12/31/21.

Our analysis of returns for the Standard & Poor’s 500 Composite Index since 1931 revealed that the path of stocks throughout midterm election years differs noticeably compared to all other years.

Since markets typically rise over long periods of time, the average stock movement during an average year should also steadily increase. But what we found was that in the first several months of years with a midterm election, stocks tend to have lower average returns and often gain little ground until shortly before the election.

Markets don’t like uncertainty, and that adage seems to apply here. Earlier in the year there is less certainty about the election’s outcome and impact. But markets tend to rally when results are easier to predict in the weeks before an election, and they continue to rise after the polls close.

Knowing that markets may be choppy in 2022 can be helpful, but investors shouldn’t consider this a reason to sit on the sidelines or try to time the market. The path of stocks varies greatly during each election cycle, and the overall long-term trend of markets has always been positive.

3. Midterm election years have had higher volatility

Sources: Capital Group, RIMES, Standard & Poor's. As of 12/31/21. Volatility is calculated using the standard deviation of daily returns for each individual month. Standard deviation is a measure of how returns over time have varied from the average. A lower number signifies lower volatility. Median volatility for each month is displayed on an annualised basis.

Elections can be tough on the nerves. Candidates often draw attention to the country’s problems, and campaigns regularly amplify negative messages. Policy proposals remain uncertain but often target specific industries or companies.

So it may not be surprising that US market volatility is higher in midterm election years, especially in the months leading up to Election Day. Since 1970, midterm years have a median standard deviation of returns of nearly 16%, compared with 13% in all other years.

4. US market returns after midterm elections have been strong

Sources: Capital Group, RIMES, Standard & Poor’s. Calculations use Election Day as the starting date in all election years and November 5th as a proxy for the starting date in other years. Only midterm election years are shown in the chart. As of 12/31/21.

The silver lining for investors is that after such bouts of volatility, markets tend to rebound strongly in subsequent months. And the rally that often starts shortly before Election Day isn’t just a short-term blip. Above-average returns are typical for the full year following the election cycle. Since 1950, the average one-year return following a midterm election is 15%. That’s more than twice the return of all other years during a similar period.

5. US stocks have done well regardless of the makeup of Washington

Sources: Capital Group, Strategas. As of December 31, 2021. Unified government indicates control of the White House, House and Senate by the same political party. Unified Congress indicates control of the House and Senate by the same party, but control of the White House by a different party. Split Congress indicates control of the House and Senate by different parties, regardless of White House control.

There’s nothing wrong with wanting your preferred candidate to win, but investors can run into trouble when they place too much importance on election results. That’s because, historically, elections have had very little impact on long-term investment returns.

In 2020, many investors feared the 'blue wave' scenario, or Democratic sweep. But despite these concerns, the S&P 500 Index rose nearly 35% following the 2020 election (through January 12, 2022).

Going back to 1933, markets have averaged double-digit returns in all years that a single party controlled the White House and both chambers of Congress. This is just below the average gains in years with a split Congress, a scenario which many believe is a strong possibility in 2022. Even the 'least good' outcome, when the president’s opposing party controls Congress, notched a solid 7.4% average price return.

What’s the bottom line for investors?

US midterm elections — and politics as a whole — generate a lot of noise and uncertainty. While midterm election years have exhibited these five trends in aggregate over long periods, it is important to remember that each year is different and follows its own path.

There is a good chance of higher volatility in 2022, but no need to fear it. The reality is that long-term equity returns come from the value of individual companies over time. Smart investors would be wise to look past the short-term highs and lows and maintain a long-term focus.

 

Matt Miller is a Political Economist and Chris Buchbinder is an Equity Portfolio manager at Capital Group, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any person.

For more articles and papers from Capital Group, click here.

 

  •   16 March 2022
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

2022 outlook: buy a raincoat but don't put it on yet

Get set for a bumpy 2026

The US is no longer a model for democracy

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

SMSF strategies

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Planning

Avoid unnecessary CGT with this estate planning clause

A simple estate plan can create a ticking time bomb. One overlooked clause can pit spouses against children, delay inheritances, and potentially leave a family facing an unexpected tax bill worth hundreds of thousands of dollars.

Exchange traded products

The hidden trade-off in fixed income ETFs

Some investment trade-offs are immediately visible. Others are embedded in the way a portfolio is constructed. Understanding the difference may explain why similar-looking investments can produce surprisingly different results.

Retirement

The mortgage free retirement is fading

What happens when a generation reaches retirement carrying obligations previous generations largely avoided? New research suggests we may need to rethink both how much we need in retirement and what life could look like.

Retirement

The key question to inspire a confident and purposeful retirement

Most people spend decades planning for retirement. Far fewer plan for what happens when they get there. The difference may explain why so many find the transition harder and less fulfilling than expected, despite careful preparation.

Latest from Morningstar

Making the case for a 'good enough' portfolio

Some investors spend years chasing the perfect strategy. Others choose a path that’s simply good enough and move on. Which approach is more likely to deliver both better outcomes and a happier financial life over the long run?

Investment strategies

Is the US market as expensive as CAPE says?

Many investing ideas survive for decades. But that does not make them right. A famous valuation measure implies that US shares are dangerously expensive, but the evidence may point to a very different conclusion.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.