Markets hate uncertainty, and few events create more widespread uncertainty than national election years.
In a recent Market at closing Live, senior market strategist John Rowland explained a lesser-known but powerful historical pattern: Midterm election years tend to be some of the most volatile periods for the S&P 500 Index ($SPX). It is not due to partisan politics, but rather the result of how pre-election uncertainty affects positioning, capital allocation and investor psychology.
The data goes back almost a century and the message is consistent.
Looking back to 1962, the S&P 500 has consistently underperformed in the 12 months leading up to the midterm elections. The average return of the index in this period is a decline of 1.1%, compared to a positive return of 11.2% during the non-interim periods.
Additionally, the average negative return is a staggering 18%, including a 22% decline in the 12 months leading up to the 2022 midterm elections.
This doesn’t mean markets should crash in the new year. There are also some positive returns mixed in the data set, and the market never follows a single script.
However, this pattern suggests that as we get closer to 2026, volatility is more likely to increase, rallies are more likely to be limited, and pullbacks tend to be deeper than investors are accustomed to during strong bull cycles.
John also highlights a broader pattern linked to this behavior: a market cycle that repeats itself over three years.
Historically, markets have often experienced several years of strong gains followed by a weaker or corrective year, which often aligns with midterm election cycles. These “down” years don’t always produce full-blown bear markets, but they often lead to a reversion to the mean (in other words, a cooling period after strong returns).
Instead of double-digit annual gains, investors may face a situation where returns stabilize into the low single digits or fluctuate with greater volatility.
What makes this discussion especially relevant is the timing.