Here's some surprisingly good news for the stock market this midterm election year

By Mark Hulbert

There is a strong historical pattern of postmidterm strength

Control of Congress hangs in the balance this November.

Even taking into account the stock market's recent declines and extraordinary volatility, it is far ahead of where it would be if this were an average midterm election year.

I point this out because investors panicked earlier this week as the bottom appeared to drop out of the market - even if temporarily. Even after the market's Aug. 20 rout, the S&P 500 SPX was up 11.6% year to date on a price-only basis, versus a loss of 1.3% through the equivalent point of the average midterm election year from 1954 through 2022.

It's important for investors to realize how good they have had it. And it's about to get even better, if history is any guide. But don't get greedy.

As you can see from the above chart, the stock market in an average midterm election year doesn't hit bottom until just prior to Election Day - at which point it begins a steady uptrend for much of the subsequent 12 months. Today's stock market could drop 11% and still be no worse off than where it would stand in a typical midterm election year.

The stock market's midterm election pattern

The reason the stock market typically suffers prior to the midterms, according to researchers, is that it's reacting to uncertainty over what government policies will emerge after the election. The stock market typically drops in the face of that uncertainty, and then rallies once that uncertainty gets resolved. Interestingly, history teaches us that it doesn't seem to matter to the stock market which party dominates in the midterm elections; it tends to rally regardless, once premidterm uncertainty gets resolved.

This premidterm weakness has not been in evidence this year, needless to say. In fact, the stock market this year has been so much stronger than the historical pattern that some investors have started worrying that this year's strength represents a "borrowing" of some or all of next year's gains. If so, then 2027 is likely to be as weak as this year has been strong.

Fortunately, these investors' worries are not borne out by the data. There is no statistically significant support for the notion that postmidterm strength is dependent upon premidterm weakness. In fact, there is slight evidence to the contrary - that the postmidterm rally is stronger when the market is also strong prior to the midterms.

Take 1998, which was the last midterm election year in which the stock market's year-to-date return through mid-August was just as good as it is this year. Over the 12 months following 1998's midterm Election Day, the S&P 500 gained 22%.

To be sure, the stock market doesn't always rally this strongly following the midterms. But since its creation in 1954, the S&P 500 has never declined over the 12 months following a midterm election. In contrast, the S&P 500 has declined in 28% of the comparable 12-month periods of the other three years of the presidential cycle.

The bottom line? We need to relax in the face of the market's volatility - instead thanking the stock market for how well it has treated us. Absent this perspective, we are likely to start taking market strength for granted, which in turn could lead us to take on more risk than is prudent.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-22-26 0800ET