As midterm elections get closer, the predictions start flying.
If Republicans take Congress, the market will...
If Democrats keep control, investors should...
If Washington ends up divided, expect...
It's easy to feel like you should be doing something with your portfolio before Election Day—especially when every headline makes the outcome sound financially consequential. But here's the problem: markets don't follow political scripts nearly as neatly as we'd like them to.
History shows that midterm election years can certainly bring uncertainty and volatility. What they haven't provided is a reliable roadmap for what investors should do next. Since 1950, the second year of a presidential term—the year midterm elections occur—has produced lower average stock market returns than other years in the four-year election cycle. But the range of outcomes has been enormous, from losses of roughly 27% to gains approaching 40%.
In other words, knowing it's a midterm year doesn't tell you very much about where the market will end up.
There's another interesting piece of history: Since 1938, the S&P 500 has produced a positive return during the 12 months following a midterm election 95% of the time. Yes, that's thought-provoking, but it isn't a prediction about what will happen after the 2026 midterms. Past performance can't tell us what the market will do next. What history can give us is perspective.
Elections Don't Happen in a Vacuum
It's easy to look back at a particularly good or bad midterm year and attribute market performance to politics. But markets are responding to far more than election results.
Consider a few recent midterm years.
- In 2002, markets were still dealing with the aftermath of the dot-com crash and concerns about the economy.
- In 2008, the midterm cycle wasn't the issue because it was a presidential election year—but it provides an important reminder about putting political events in context. Markets were dealing with a global financial crisis, bank failures, and a severe recession.
- In 2018, the S&P 500 finished the year down amid concerns about interest rates, trade tensions and slowing global growth.
- And in 2022, investors were navigating high inflation and rapidly rising interest rates.
The common thread? Elections were only one piece of a much larger economic picture. Corporate earnings, interest rates, inflation, economic growth, employment, business investment, and geopolitical events can all influence markets.
Markets Don't Necessarily React the Way You Expect
One of the biggest challenges with investing around an election is that your expectations and the market's expectations may be very different. You might believe that one party gaining control of the House or Senate will be good—or bad—for a particular industry, tax policy, or the economy.
But millions of other investors are analyzing the same possibilities; markets may have already priced in an expected outcome before Election Day arrives. And even if you correctly anticipate who will control Congress, you still have to predict what legislation will actually pass, how businesses will respond, how the economy will react and, finally, how investors will interpret all of it.
That's a lot of predictions that need to go right before an election-based portfolio move pays off.
Give Your Portfolio a Better Reason to Change
None of this means you should ignore your investments during a midterm election year. It means the election itself may not be the best reason to make a change.
There are plenty of reasons your investment strategy might need attention:
- Your goals have changed.
- You're getting closer to retirement.
- Your time horizon has shortened.
- Your portfolio has become too concentrated.
- Your allocation has drifted and needs rebalancing.
- Your income needs have changed.
- You're taking more—or less—risk than you intended.
Those are reasons tied to your financial plan, rather than a prediction about which party will control Congress after November.
Your Investment Timeline Is Longer Than an Election Cycle
Congressional control can change every two years. Your investment timeline may stretch for decades. During that time, you'll likely invest through multiple presidents, dozens of congressional elections, changes in political control, recessions, expansions, new tax laws, periods of high inflation, periods of low inflation, and events no one saw coming.
Trying to reposition a portfolio for each one can quickly turn a long-term investment strategy into a series of short-term reactions.
A more useful question during a midterm election year may not be: "What will the election do to my portfolio?"
Instead, consider asking: "Has anything about my goals, timeline, or financial plan changed enough to justify changing my portfolio?"
If the answer is no, the approaching election may be a good opportunity to tune out some of the political noise and return your attention to the investment strategy you've built for the long term.
Build a Portfolio Around Principles, Not Predictions
At Principles of Financial Planning, we believe an investment strategy should be designed around your goals, risk tolerance, and long-term financial plan—not predictions about elections, markets, or the next headline.
Principled Portfolios are built around a disciplined investment philosophy designed to help you stay focused on what you can control, even when markets and the world around them feel uncertain.
CLICK HERE to learn more about Principled Portfolios and the philosophy behind the approach.