As the headline implies, this article is about elections, but the point is not to endorse a particular party or candidate. With that disclaimer out of the way and as advisors and clients know, 2026 is a midterm election year.
In fact, Election Day is barely more three months away. Advisors, experienced investors and fans of market history know at least one thing about midterm election years: Historically, those years are the worst for stocks in the four-year presidential cycle.
U.S. Bank Asset Management Group Research analyzed the 31 midterm election years spanning 1900 through 2025, discovering that “in the 12 months before midterm elections, U.S. stocks represented by the S&P 500 have historically produced an average return of 2.9%, below the 8.9% average for all years in the study.”
In fact, plenty of midterm election years included deep drawdowns, if not temporary bear markets for the S&P 500. Yet here we are with just three months before Election Day and the S&P 500 is up 9.2% year-to-date with its deepest drawdown being 8.9% and that’s with a war raging in Iran. On the other hand, maybe history is implying that some weakness is coming for stocks at some point over the next three months.
Acknowledge History, But Don’t Worship It
In investing, history does matter and it’s often said “history doesn’t always repeat, but it often rhymes.” So yes, it’s possible stocks will live up to historical midterm year patterns and retreat before the end of this year. That doesn’t mean investors should abandon risk assets wholesale and the expectation of some near-term volatility certainly doesn’t imply longer-ranging perspectives should be ditched. The reasoning is simple: Year Three of the presidential cycle is usually good for equities.
“Therefore, the biggest risk for investors over the next several months may not be the volatility: It may be a knee-jerk reaction to avoid it at precisely the point in the cycle when history has often rewarded patience,” notes Fidelity. “Since 1961, Year 3 of the election cycle has produced a healthy gain, on average, but importantly, a lower average drawdown than the other years. Over roughly the past 65 years, it’s been a year in the cycle that investors haven’t wanted to miss.”
As Fidelity puts it, midterm election years are essentially the cost of admission for reaping the rewards of what typically are strong years. In other words, it’s another case of time in the market trumping timing the market.
Headlines Have Expiration Dates
There’s no denying the current political climate is contentious and has been for some time. It’s also hard to avoid the intersection of investing and politics, but for clients that are worried about the next several months, advisors should emphasize a simple point: Stocks are responsive to political news, but they’re more responsive to fundamentals, such as earnings growth. You know, the stuff that matters.
The point is midterm elections shouldn’t shake investors out of the market. Not when just a couple of months a typically strong year commences.
“There will almost certainly be uncomfortable moments ahead for investors, possibly related to the upcoming election,” concludes Fidelity. “That’s not the point: It’s whether investors can stay disciplined enough to look beyond the political news headlines to take part in what has historically followed.”
Related: Gold Has Been One of 2026's Biggest Losers. Is It Finally a Buying Opportunity?