The upcoming midterm elections, traditionally held in November, may precede a period of robust stock market performance, according to analysis from Ken Fisher, founder and executive chairman of Fisher Investments.
Historically, the period following midterm elections has seen increased legislative gridlock, which has, in turn, correlated with positive stock market trends. This phenomenon, sometimes referred to as the "midterm miracle," is characterized by a significant bull run in the nine months following the elections.
Legislative Gridlock and Market Performance
Since 1914, the president's party has consistently lost seats in Congress during midterm elections. Data since 1925 indicates that the S&P 500 has shown gains in 84% of the fourth quarters of midterm years and in 92% of the nine-month periods beginning in those quarters, averaging a substantial 19.8% increase. This trend is not limited to the U.S. market, as global stocks have also historically performed well during these periods.
The author points to the years leading up to midterm elections as typically featuring significant legislative pushes by the sitting president, often accompanied by heightened political rhetoric and market uncertainty. This period, however, is followed by a reduction in major legislative activity once the midterms shift the balance of power and a president enters the latter half of their term. This decreased legislative output, or gridlock, is seen as a positive catalyst for the stock market.
Historical Trends
Analysis of midterm election outcomes reveals a consistent pattern of seat loss for the incumbent president's party. Since 1914, the president's party has lost House seats in 89% of midterms, with an average loss of 30 seats. Similarly, in Senate midterms, the president's party has lost seats in 71% of cases, averaging four seats. Even in instances where the president's party maintains control of one or both chambers, a shift in the margin of control can further enhance gridlock.
The "midterm miracle" effect is observed regardless of the preceding stock market performance or which party is in power. The author cites the period from the start of Q4 2022 through the end of Q2 2023, when the S&P 500 rose 26%, as an example of this trend occurring despite weaker market conditions leading into October.
Investor Strategy Amidst Political Noise
Despite the potential for intense political rhetoric and partisan maneuvering during campaign seasons, investors are advised to focus on the historical market response to the subsequent period of legislative quiet. The analysis suggests that the market tends to anticipate a decrease in political risk, leading to positive performance as the focus shifts away from contentious legislation.
The author, Ken Fisher, is the founder and executive chairman of Fisher Investments and a regular columnist in 21 countries.