After some shaky months in the earlier part of the year, the S&P 500 (^GSPC +0.16%) -- which tracks around 500 of the largest American companies on the market -- finished the year strong, up 16%. This marked the third consecutive year the index finished with double-digit returns (23% in 2024 and 24% in 2023).
Many investors are appreciative of the S&P 500's run, while being cautiously optimistic about what the future could hold. Although nobody can predict how the index will continue to perform, there is a major event happening this year in America that has historical context: the midterm elections.
Unfortunately, this hasn't been historically good news for investors. Let's take a look at why.
Image source: Getty Images.
How the index performs leading up to midterms
For perspective, I want us to look at the S&P 500's performance over the 12 months leading up to the midterm elections, which happen in November. Specifically, we'll look at the index's largest drawdown, which is how much it drops from its highest to lowest peak.
| Midterm Date | Largest Drawdown Before Midterm |
|---|---|
| Nov. 8, 2022 | (25.4%) |
| Nov. 6, 2018 | (10.2%) |
| Nov. 4, 2014 | (7.4%) |
| Nov. 2, 2010 | (16%) |
| Nov. 7, 2006 | (7.7%) |
| Nov. 5, 2002 | (33.8%) |
| Nov. 3, 1998 | (19.3%) |
| Nov. 8, 1994 | (8.9%) |
| Nov. 6, 1990 | (19.9%) |
| Nov. 4, 1986 | (9.4%) |
| Nov. 2, 1982 | (18.9%) |
| Nov. 7, 1978 | (12.9%) |
| Nov. 5, 1974 | (41.8%) |
| Nov. 3, 1970 | (29.5%) |
| Nov. 8, 1966 | (22.2%) |
| Nov. 6, 1962 | (28%) |
| Nov. 4, 1958 | (5.6%) |
| Nov. 2, 1954 | (4.4%) |
| Nov. 7, 1950 | (14%) |
| Nov. 5, 1946 | (26.6%) |
| Nov. 3, 1942 | (20.5%) |
| Nov. 8, 1938 | (28.9%) |
| Nov. 6, 1934 | (29.3%) |
| Nov. 4, 1930 | (34.8%) |
| Nov. 2, 1926 | (9.4%) |
Data source: Longview Economics.
Looking at these results, it's hard to deny the consistency. A few times may be a coincidence, but a pattern over decades is worth paying extra attention to and preparing accordingly.
Why do these drawdowns happen before the midterm elections?
There typically isn't a single reason for these drawdowns leading up to the midterm elections; it's a combination of things. The main factor, however, may be the uncertainty that comes with the midterm elections.
The midterms (and elections in general) mean there could be a change in Congress and other governing bodies. This means that laws surrounding taxes, industry-specific regulations, government spending, and trade policies are subject to change, having a domino effect on business decisions.
With the uncertainty leading up to the midterm elections, many investors choose to sit on the sidelines until the smoke clears or take profits while they have them to avoid holding into a stock market correction or drop.
SNPINDEX: ^GSPC
Key Data Points
Should investors be worried?
Again, nobody can say with 100% certainty that this trend will continue this year. However, if it does, investors shouldn't view it as a reason to panic or avoid the market altogether. Instead, consider it a chance to buy shares at a "discount" compared to their previous price.
Looking at the 25 examples from our above table, here's how the S&P 500 has performed, on average, in the short time following the midterm elections:
- 3 months after: 5.8%
- 6 months after: 10.5%
- 12 months after: 14.8%
Despite the historical consistency, one thing you want to actively avoid is trying to time the market. It could be tempting to see this information and sell stocks now with intentions of buying them back cheaper near the midterm elections, but that's leaning more toward gambling than investing.
The best thing you can do is remain consistent, and if a drop occurs, appreciate that your dollar goes further when you're investing. When in doubt, remember this: Time in the market beats timing the market.
