Picture this: the stock market has been on an absolute tear for years now, posting solid double-digit gains and leaving many investors feeling pretty optimistic about what’s next. But as we head into 2026, there’s this big elephant in the room – the midterm elections. I’ve always found it fascinating how politics and Wall Street collide, and this time around, it feels like the potential for turbulence is higher than usual.
We’re coming off a strong 2025, with major indexes up significantly, and a lot of pros are calling for more upside. Yet, throw in congressional races, policy battles, and all the partisan noise, and suddenly things could get a whole lot choppier. In my view, it’s worth paying close attention because history has some clear lessons here.
Why Midterm Years Often Shake Up the Market
If you’ve been investing for a while, you probably know that election cycles tend to follow certain patterns. Midterm years, in particular, stand out as the roughest patch in the four-year presidential timeline. Data going back decades shows that these periods bring more volatility and larger pullbacks compared to other years.
Think about it – uncertainty is the market’s worst enemy. When control of Congress is up for grabs, investors start worrying about shifts in taxes, regulations, spending priorities, and more. That kind of unknowns can lead to hesitation, profit-taking, and sharper swings.
One thing that always strikes me is how consistent this trend has been. On average, the S&P 500 experiences a much deeper intra-year decline during midterms. We’re talking around 19% drops versus just 12% in non-midterm years. That’s not insignificant, especially when you’re riding a multi-year bull market.
Looking Back at Historical Performance
Let’s dig a bit deeper into the numbers because they really tell the story. Over the past several decades, midterm election years have delivered positive returns overall, but the path there is rarely smooth.
For instance, the broad market has averaged gains of about 4.6% in these years since the late 1940s. Not bad on paper, right? But when you zoom in, especially on second-term presidencies or certain decades, the picture changes.
Interestingly, in the sixth year of a decade – which 2026 happens to be – the market hasn’t closed in the red since the 1960s. Add in the fact that second midterms under the same administration, particularly Republican ones, tend to perform stronger, and you get average returns closer to 12%.
Of course, past performance isn’t a guarantee, but these patterns give you something to lean on when planning your strategy.
- Average S&P 500 intra-year drawdown in midterms: ~19%
- Drawdown in other years: ~12%
- Overall midterm year return since 1949: +4.6%
- Second midterm under same president: Often stronger, around +12%
- Sixth year of decade performance: Historically positive
Seeing it laid out like that makes the volatility feel more tangible, doesn’t it?
The Early-Year Weakness Pattern
One of the most predictable aspects of midterm years is that the pain often comes early. The first half, sometimes even the first three quarters, tends to be the weakest period.
Why? Markets are forward-looking creatures. They price in potential growth slowdowns or policy hurdles well before the votes are cast. Once the election dust settles and clarity emerges, sentiment can shift quickly.
Equity markets are very good at anticipating higher growth before it actually arrives, which can lead to softer returns early on.
As yields rise with improving economic data, those intra-year corrections can feel amplified. It’s almost like the market gets ahead of itself, then pauses to catch its breath.
Policy Risks Adding Fuel to the Fire
Beyond the elections themselves, 2026 comes with a laundry list of other potential catalysts. We’re talking leadership changes at the central bank, ongoing trade policy debates, and possible budget standoffs in Washington.
Any one of these could create headlines and move markets on its own. Combined with heated campaign rhetoric? It sets the stage for heightened emotions among traders and investors alike.
A partial government shutdown remains a real possibility if lawmakers can’t agree on funding priorities, particularly around healthcare subsidies. While these events have become somewhat routine, they still inject uncertainty.
The good news? Markets have historically shrugged off funding lapses pretty quickly, as long as they don’t touch the debt ceiling. Those are the real scare moments that can lead to broader credit concerns.
This would be more about appropriations than a true debt crisis – something the market can typically look past.
– Market strategist
Still, in an already charged political environment, even temporary disruptions could amplify swings.
Defensive Sectors That Tend to Shine
When volatility picks up, smart money often rotates toward more stable areas of the market. Over the past thirty years or so, certain sectors have consistently outperformed during midterm years.
Healthcare tops the list, followed closely by consumer staples and utilities. These are the classic “defensive” plays – companies that provide essential goods and services people need regardless of the economic or political backdrop.
- Healthcare: Strong track record, though sensitive to policy changes around subsidies
- Consumer Staples: Everyday necessities like food and household products
- Utilities: Regulated, steady demand for power and water
I’ve noticed that during uncertain periods, these areas often hold up better while growth-heavy tech or discretionary names take a breather. It doesn’t mean you abandon everything else, but tilting the portfolio can help smooth the ride.
Of course, healthcare’s performance could face headwinds if budget battles intensify. But broadly speaking, the sector’s fundamentals remain solid.
The Potential Sweet Spot Later in the Year
Here’s where things get interesting. While the first nine months or so can feel bumpy, history suggests a turning point often arrives around October of midterm years.
Once the election results are in and investors have clarity on congressional makeup, markets tend to breathe a sigh of relief and rally into year-end. That post-election period through the following spring has been called the “sweet spot” of the cycle for good reason.
Some analysts are projecting the S&P 500 could still finish 2026 up 8% to 12%, delivering a fourth consecutive positive year. That would be impressive given the headwinds.
Around October, markets typically reverse course and start climbing again as uncertainty fades.
Couple that with ongoing technological advances driving corporate earnings, and the long-term outlook doesn’t look nearly as gloomy as the short-term noise might suggest.
What This Means for Your Portfolio
So, where does this leave individual investors? In my experience, the key is staying disciplined rather than reacting to every headline.
Volatility isn’t necessarily a bad thing – it creates opportunities for those with cash on the sidelines or the patience to ride out dips. But it does pay to be proactive.
Consider rebalancing toward those defensive areas we mentioned. Keep an eye on quality companies with strong balance sheets. And perhaps most importantly, avoid making emotional decisions based on campaign trail drama.
Markets have navigated countless election cycles before, and they’ve always come out the other side. This one might feel more polarized, but the underlying economic drivers – innovation, productivity, consumer spending – remain in place.
At the end of the day, 2026 could very well end up being another positive year, just with a few more twists and turns along the way. Staying informed, diversified, and focused on the long game has always been the winning approach.
Whether you’re a seasoned trader or someone building wealth over decades, understanding these cycles can help you navigate whatever Washington throws our way next.
One final thought: while politics grabs the headlines, it’s corporate earnings and economic fundamentals that ultimately drive stock prices over time. Keep that perspective, and the midterm volatility might feel a little less daunting.
