Worried about the midterms? Here’s how smart investors play them every time

Key Points:

• Midterm elections, occurring every four years, typically lead to increased legislative gridlock, which historically sparks a strong bull market in US and global stocks starting in October.
• Presidents push major, controversial legislation in their first two years, causing market volatility, but after midterms, when the president’s party usually loses seats, legislative gridlock reduces political risk and boosts stock performance.
• Since 1925, the S&P 500 has gained in 84% of midterm year Q4s and 92% of the subsequent nine-month periods, averaging nearly 20% returns, with similar positive effects observed in international markets.
• The positive market impact of gridlock is independent of which party holds power or earlier stock performance, as investors often overestimate political risk and fail to anticipate the benefits of legislative calm.
• Despite heated rhetoric and close races in the upcoming midterms, the expected increase in gridlock should lead to reduced political uncertainty and a favorable environment for stocks, especially as the president enters a lame-duck phase.