A Fidelity study cited by The Motley Fool finds the S&P 500 has risen in the year following a midterm election 95% of the time since 1938, regardless of which party wins. The index sits at 7,743.41 as investors weigh whether that pattern will hold, even as some valuation gauges flag the market as expensive.
A 95% track record since 1938
Stock returns over the next twelve months track one signal more reliably than complex valuation models: the midterm election cycle. According to research by Fidelity, the S&P 500 has posted a positive return in the year after a midterm election 95% of the time since 1938, and the pattern holds no matter which party wins or how many seats change hands.
The S&P 500 traded at 7,743.41, up 0.51% as the pattern drew fresh attention. The explanation offered is straightforward: political uncertainty tends to weigh on markets ahead of a vote, then eases once results are known.
Year three of the cycle stands out
The year immediately after a midterm — year three of the presidential cycle — has been the strongest stretch on record. Since 1950, stocks have generated an average annual return of 14.5% during year three, the period investors are now entering.
Year four ranks second, with an average annual return of 9.1% and a 72% chance of a positive year, though it also brings the widest swings between gains and losses. By contrast, year two has been the weakest, averaging a 4.9% return with only a 55% chance of a positive twelve-month result since 1950.
September's rough patch tends to precede the rally
The run-up to midterms has its own pattern. Cantor Fitzgerald found that the market has dropped 5% or more in September in 15 of the past 24 midterm election years since 1930. Yet Carson Group notes that since 1950, October and November have been the best months of midterm years, up 3% and 2.7% respectively. UBS has separately observed that the market has rallied about 6% from the end of September through year-end during these years.
A different index than in past cycles
The Motley Fool's Geoffrey Seiler cautions that the sample size behind the pattern is still small and that past performance doesn't guarantee future results. He argues the index's composition has changed since earlier cycles: today's S&P 500 is led by large technology companies with heavy operating cash flow generation rather than the cyclical industrials, energy, and financial firms that once dominated it, and he points to artificial intelligence as a growth driver he sees as still in its early stages.
Source: The Motley Fool
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