A man and a woman at the polls voting.

Amid a few wild weeks of corporate earnings, key economic data and a Federal Reserve meeting, the U.S. midterm elections are now tossed into the mix, too. Volatility followed a few recent elections, so you might wonder how the markets could react to a variety of outcomes this round.

Politics and investing: Separate the two

When investing, you might not want election outcomes to have too great an influence on your asset allocation. Certainly, investing with your values has become a popular way to pick stocks and funds, but there are other factors to the market to consider, such as historical performance and recent trends. Take the energy sector as an example this year – it’s far and away the leading group in the S&P 500 with a return of more than 60% in 2022, so folks who avoided oil and gas companies missed out on those gains.

Wall Street probably won’t act surprised

Disclaimer aside, let’s dive into what the midterm elections could mean for your money. According to S&P 500 options pricing, which can be used to determine expected volatility, traders don’t foresee excessive market swings after voters head to the polls on November 8th. Instead, uncertainty has been focused on the Fed meeting and jobs report earlier this week. Beyond that, volatility might also come in the wake of next Thursday’s CPI report.

Are strong returns just getting started?

While the midterms might not mean much in the short run for the stock market, we did find an interesting pattern when looking further ahead. It all has to do with seasonal tailwinds, i.e., the conventional Wall Street wisdom that says November through April is the best six-month stretch for stocks.

According to Stock Trader’s Almanac, the typical S&P 500 gain during that six-month stretch is just shy of 7% (looking at data going back to 1945). If we home in on that period for just midterm years (such as 2014 or 2018), the average returns spikes above 14%. Maybe traders noticed this trend – this past October featured the biggest gain for the Dow since 1976, while the S&P 500 notched an impressive 8% rise.

We can go back even further, too – data since 1928 shows that the November through April period, starting in a midterm year, boasts an average return of nearly 12%.

Chart titled S&P 500 returns in mid-term election years since 1928 displays S&P 500 returns in six-month periods and highlights the seasonal tailwinds from November of a midterm year through April. The six-month period returns are January-June (-1.4%); February-July (-0.9%); March-August (-1.5%); April-September (-2.1%); May-October (-0.6%); June-November (2.6%); July-December (4.9%); August-January (7.5%); September-February (9.5%); October-March (11.5%); November-April (11.9%); and December-May (9.5%). Source: Ally Invest, Bloomberg

So, while the elections almost always create an extra layer of uncertainty in markets, historically, midterms often result in a positive run for stocks, with gains that began in October and may persist. It’s another reminder to stick with your investing game plan after a tough 2022. The worst of the bear market might be in the rearview mirror. 

Positive price action longer-term, too

Let’s widen the scope by assessing one-year returns on the S&P 500 from November of a midterm year through October of the following year. For all years since 1962, large-cap U.S. stocks feature an average return (not including dividends) of 8.5% from November 1 through October 31. Not bad! Looking at only the 15 midterm years in that timeframe, though, the typical rally is nearly double that amount at 16.3%. Moreover, gains have been focused within the earlier part of this period with an average 7.3% three-month advance from November through January. Perhaps the end of election uncertainty breathes a sigh of relief into the markets.

Chart titled S&P 500 rallies seen post-midterms shows the consistently positive returns in the six and 12 months post-election from 1962 to 2018 with averages of 7.3% (three months post-election), 15.1% (six months post-election) and 16.3% (12 months post-election). The sole periods of negative returns are in the three months post-election in 1994 (-0.4%), 2002 (-3.4%), 2014 (-1.1%) and 2018 (-0.3%). Source: Ally Invest, Bloomberg

What does a split government mean for the S&P 500?

Those are stellar numbers, no doubt. You might wonder, however, what a divided government could imply for stocks. Prediction markets suggest a high chance of the midterm elections resulting in a split government, according to PredictIt.com. Looking at data from 1928 through 2021, scenarios of either a Democratic President and GOP Congress or a Democratic President and split Congress, saw an average S&P 500 price return of more than 13% – as against 7.8% for all years from 1928 through 2021.

The bottom line

Be careful about allowing what plays out on Election Day to impact your asset allocation. Investors on both sides of the aisle might feel anxiety about what could unfold with a new Congress next year, but it would be unusual to see significant volatility. And if history is any guide, there might actually be greater upside potential for stocks.