Markets are sweating it out ahead of the midterm elections, but the event historically heralds strong performance for stocks — regardless of whether it's a red or blue wave, split decision, or status quo in Washington.
The S&P 500 tends to perform well after both midterm and presidential elections. According to a CNBC analysis of S&P 500 returns after elections from 1980 through 2024, the index rose an average of 0.2% after one day and one week, and 1.1% after one month across both presidential and midterm elections.
A year later, the index gained an average of 13.7% after midterms and 13.8% after presidential elections. Returns were positive in 91% of cases. And the S&P 500 was up after all 11 midterms from 1982 through 2022.
Short-term returns were less reliable, particularly after presidential contests, which produced slightly negative average returns after one day and one week.
"There's some anxiousness before these elections," Ryan Detrick, CNBC contributor and chief market strategist at Carson Group, told CNBC. "Once you are through it, it's a big relief and markets tend to do pretty well."
Still, the market usually prefers divided government: one party in charge of the White House and the other holding at least one house of Congress.
Across 10 midterm and five presidential elections that left no single party in charge, the S&P 500 rose an average 15% after one year. One-year returns were positive in 14 out of 15 cases. By comparison, the index gained an average of 11.5% over the year after elections that resulted in single-party control.
"If you have a huge red wave or a big blue wave, markets actually kind of don't like that as much because you have too much spending one way and too much power," Detrick said.
Leaving Democrats in control of Congress with a Republican in the White House — a scenario that may emerge from the elections on Tuesday — was also positive. A CNBC analysis found that after the three midterms (1986, 1990 and 2006) when Democrats controlled both houses and a Republican held the presidency, the S&P 500 averaged a 0.5% decline on the reaction day but was up 3.4% a month later and 10.9% after a year.
Granted, elections may be coincident events to factors that matter far more for market performance.
The S&P 500 plunged 22.1% in the year after the 2000 elections due to the dotcom bust, marking the worst post-election performance since 1980. Conversely, the S&P 500's best post-election year was a 38.3% gain after the 2020 elections, when markets mounted a massive comeback from the COVID-induced selloff.
Investors should bear in mind that Federal Reserve policy and the corporate earnings cycle ultimately matter more than elections, according to Société Générale.
Stocks declined in the aftermath of the 2018 midterms, for instance, when Democrats wrested control of the House during President Donald Trump's first term. More importantly, the Fed tightened monetary policy that year, raising interest rates four times, and the S&P 500 ended the year down 6.2%, though the market was up 11.7% a year after the election.
The big swing factor now is AI and whether declines in tech will continue. As long as the AI wave is still moving and the economy keeps growing, "this bull market is probably still alive and well," Detrick says.
But a Democratic sweep of the House and Senate would almost certainly pressure the AI infrastructure buildout and could lead to more retrenchment.
The bond market is also skittish with yields rising globally and a mini debt crisis in France. And the war with Iran could get worse post-election if President Trump follows through on threats of more strikes or Iran escalates.
"Seasonality isn't destiny, and worries around Iran, AI and France won't mysteriously vanish," said Jim Reid, Deutsche Bank's global head of macro and thematic research, in a note.
If history is any guide, we could see a Santa rally and S&P 500 gains after the midterms. But this is still an AI-driven market, with geopolitics, the Fed, and bond market very much in charge.
— CNBC's Chris Hayes contributed reporting.
