What Every Investor Gets Wrong About Midterm Elections
You have probably felt it before.
The news gets louder. Headlines turn ominous. Friends at dinner talk about pulling back, waiting things out, or moving money somewhere "safer" until the election settles down. It is a completely human reaction. And historically, it has been one of the most expensive mistakes an investor can make.
Midterm election years have a reputation for rattling markets, and that reputation is not entirely undeserved. Volatility is real. Pullbacks are common. Uncertainty is the defining feature of the cycle. But here is what most investors never see: the fear itself is often the signal.
Markets have historically done their heaviest work during midterm uncertainty, then rewarded the investors who stayed patient more generously than almost any other period in the four-year presidential cycle.
The data going back to 1950 tells a consistent story. This article walks through what that story actually says, why investors tend to get it backward, and what it means for a portfolio built to last.
The Contrarian Case: Uncertainty Is Not the Enemy
Here is the insight worth remembering long after you close this article:
"Markets do not fear elections. Markets fear unresolved uncertainty. And midterm years, by definition, resolve it."
That distinction matters enormously.
The volatility that builds through the first three quarters of a midterm year is not random. It is the market pricing in a range of possible political outcomes:
Who controls the House
Who controls the Senate
What legislation becomes possible or impossible
How regulatory priorities shift
Once the election occurs, that range of outcomes collapses into one.
Uncertainty resolves.
Historically, markets have often responded accordingly.
This is not politics. It is behavioral economics playing out on a national scale.
What 70 Years of Data Actually Shows
Going back to 1950, midterm election years have produced the largest average intra-year pullback of any year in the four-year presidential cycle, averaging approximately 16.7% from peak to trough.
That is a meaningful decline, and it has sometimes been far worse.
In 1974, the market fell nearly 36% before election day.
In 2022, the market declined roughly 24.5%.
But here is the other side of the same data.
In the 12 months following the intra-year low, the S&P 500 has historically returned an average of 36.5%, with a median return of 37.5%.
Every single midterm year in the data set produced a positive return in the year following the low, regardless of which party won.
Not most.
Every one.
[Insert Chart: S&P 500 quarterly returns during midterm vs. non-midterm periods]
Breaking it down by quarter sharpens the picture further.
The quarter immediately following a midterm election has averaged an 8.2% return.
Comparable non-election periods averaged roughly 1.1%.
The election quarter itself (Q4) averaged 7.6%, compared to 4.2% in non-election Q4 periods.
The data is not subtle.
Investors positioned before and through the resolution historically captured much of the recovery.
Why Investors Keep Getting This Wrong
Knowing the data is one thing. Behaving consistently with it is another.
Most investors do not make election-year mistakes because they lack information. They make them because of how the human brain responds to uncertainty. Behavioral finance research consistently highlights several psychological patterns that become amplified during volatile election cycles.
Loss Aversion
Investors often feel the pain of a 10% decline roughly twice as intensely as the pleasure of a 10% gain.
When markets pull back sharply, the urge to "do something" becomes powerful, even when patience may be the more disciplined decision.
Availability Bias
Recent headlines often feel more important than long-term data.
A week of alarming news can outweigh decades of historical perspective.
Narrative Fallacy
Investors naturally create stories explaining why "this time is different."
Every election cycle feels uniquely important.
History suggests that markets frequently adapt faster than emotions do.
Affluent investors who work within a disciplined planning framework often share one key trait:
They do not decide how to react during volatility.
The decision-making process was already built into the plan long before uncertainty arrived.
Trying to Time the Market Sounds Smart and Rarely Works
The midterm pullback pattern may seem to invite a simple strategy: Sell before the decline. Buy back at the bottom. In theory, it sounds logical.
In practice, it requires being right twice:
When to exit
When to re-enter
Mistiming either decision can dramatically reduce long-term returns. Missing even a small number of the market's strongest days can materially change portfolio outcomes. And those strong recovery days often occur during the same periods of volatility that convince investors to step aside.
The investors who historically benefited from post-midterm recoveries were already invested when the rebound began.
Those waiting for clarity often found much of the recovery had already happened.
Discipline is not passive. It is one of the most active investment decisions a person makes.
Diversification: The Strategy That Works Across Political Cycles
No one can predict which sectors will benefit from a given election result.
Political shifts can influence:
Energy
Healthcare
Financial services
Technology
Interest-rate-sensitive industries
But those impacts are rarely linear or predictable.
Diversification does not rely on forecasting.
Instead, it spreads risk across:
Asset classes
Geographies
Sectors
Time horizons
This becomes particularly valuable during midterm years, when concentrated positions can create very different outcomes than broadly diversified portfolios. Equally important is income planning. A well-structured retirement income strategy can reduce the need to sell growth assets during downturns. That structure often removes one of the largest emotional triggers investors face: feeling forced to act.
A diversified portfolio paired with a thoughtful income strategy does not eliminate volatility. It makes volatility more manageable.
The Year After Has Historically Been Strong
For context, the presidential cycle has historically shown different market characteristics across all four years.
- First-year-in-office pullbacks averaged roughly 12.0%.
- Midterm years averaged approximately 16.7%.
- Pre-election and election years generally fell in between.
Midterm years have historically been the most volatile.They have also frequently preceded stronger recovery periods.
November itself has historically shown relative strength.
- Midterm-election Novembers averaged roughly 3.0% returns.
- Non-midterm Novembers averaged closer to 1.8%.
- The 11 months following election month averaged roughly 17.0% during midterm cycles.
None of this guarantees repetition.But consistency across more than 70 years of varying political and economic environments provides useful context.
What This Means for Your Portfolio Right Now
Here is the practical takeaway.
Midterm years have historically produced:
- Above-average volatility
- Larger intra-year pullbacks
- Elevated uncertainty
- Historically stronger recoveries after uncertainty resolves
Investors who remained diversified and disciplined often captured those recoveries. Investors attempting to time markets frequently missed portions of them. The more useful questions are not political. They are personal.
Ask yourself:
- Is your portfolio aligned with your actual goals and timeline?
- Does your income strategy protect you during downturns?
- Have you reviewed tax exposure, estate planning, and protection strategies recently?
- Is your investment plan built for uncertainty, or only for favorable markets?
These are the questions a comprehensive financial plan answers in advance.
Let’s Build a Plan That Outlasts Any Election
If market volatility has you wondering whether your strategy still fits where you are in life, that question deserves a real conversation — not another headline.
At Legacy Tree Financial, we work with:
- Families
- Pre-retirees
- Retirees
- Business owners
Our focus is helping clients build financial plans designed to work across market cycles, not just favorable periods.
A portfolio review is not about reacting to current events.
It is about making sure the decisions you made years ago still align with the goals you have today.
Scheduling takes only a few minutes.
The clarity can last much longer.
Book your complimentary strategy with our Legacy Tree Financial Team.
Visit www.legacytreefinancial.com or use your scheduling link below.
Sources & Disclosure
Sources: First Trust Portfolios L.P., Bloomberg. Data covers 1950–2024.
The S&P 500 Index is an unmanaged index of 500 large-cap U.S. companies and cannot be purchased directly by investors.
Past performance is no guarantee of future results.
Indices do not reflect fees, expenses, or taxes.
This content is for educational purposes only and does not constitute investment advice or a specific recommendation for any individual.
All investing involves risk, including possible loss of principal.
Securities offered through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC.