Midterms, Drawdowns, and the Post-Election Pattern

The table above captures nearly a century of midterm election cycles and subsequent S&P 500 performance. The pattern is not subtle. On average, the twelve months leading into midterm elections show meaningful stress. The average largest drawdown in the year prior is roughly -18%. In several cycles, 1930, 1974, 2002, 2022, the market experienced deep declines before voters went to the polls.

The midterm year itself often coincides with macro uncertainty. Fiscal direction is unclear, legislative momentum stalls, and monetary policy may already be tightening. Elections do not cause drawdowns, but they frequently occur during transitional macro phases. What stands out in the data is what happens next.

Across cycles since 1926, the average 12-month return following midterms is strongly positive. Six months and twelve months post-election have historically delivered above-average gains. The pattern holds across very different economic eras: post-war expansion, inflationary 1970s, Volcker tightening, tech cycles, financial crises, and post-pandemic normalization. This is not limited to one side of the political spectrum.

It is a regime shift in uncertainty.

Once the election is over, markets don’t need to price in political uncertainty. Even when the result produces gridlock, that gridlock often reduces the probability of abrupt policy change. Certainty leads to lower risk premiums. The key is not who wins. It is that the event resolves.

Why this pattern exists Midterms typically occur in the second year of a presidential term. Historically, this stage often aligns with:

-Monetary tightening cycles approaching maturity

-Slower earnings momentum

-Elevated policy uncertainty

Markets correct not because of elections, but because macro conditions are often already transitioning. Once political uncertainty fades and tightening cycles wind down, risk appetite stabilizes. The rebound is less about politics and more about regime clarity.

Regime context matters

The midterm boost is not guaranteed though.

If the macro economy is weakening rapidly

recession signals flashing, credit spreads widening, liquidity contracting, the election resolution alone cannot override tightening financial conditions.

However, in environments where liquidity is neutralizing or stabilizing, the historical post-midterm rally becomes more plausible. This is where the prior discussion on RRP and liquidity regimes becomes relevant. In a world of abundant liquidity, elections matter less. In a tighter liquidity regime, the reduction of uncertainty can have greater marginal impact, but it does not replace the need for reserves, funding stability, or earnings growth. Political cycles operate within liquidity cycles.

Allocation Implications The data suggests that pre-midterm drawdowns are common, and post-midterm recoveries are historically robust. However, blindly trading elections is misguided. Instead, midterms should be viewed as: A volatility window within a broader macro system. If a meaningful drawdown has already occurred ahead of the election, history suggests forward risk-adjusted returns improve once uncertainty resolves. If markets are extended, highly valued, and liquidity is tightening into the election, the asymmetry of further upside diminishes. The interaction between liquidity conditions, earnings trajectory, and positioning matters more than the ballot outcome.

Midterms do not create bull markets. They often mark the transition between uncertainty and clarity. And markets price clarity.