I’ve said it before, and I’ll say it again: it’s not the political party that matters, but the policies. Investors, I believe, are better served when they focus not on the partisan noise and headlines but the policies that bring about change.
I bring this up because we’re a little over 80 days from another midterm election. The S&P 500 closed at an all-time high on Thursday and is up more than 13% for the year. But between now and November 3 sits the stretch of the calendar investors like least.
So, I pulled up six decades of market data to see what that stretch has actually looked like.
September Has Earned Its Reputation. August Has Not
Using data going back to 1960, I found that only one month—September—has had a negative average price return over multiple time periods. Over the long term, it’s been down 0.76% on average, and over the short term, it’s been down 1.34%.
August is a different story. The eighth month has averaged a positive 0.26% going back to 1960 and a positive 0.16% over the past two decades. Its bad name comes from a handful of poor-performing Augusts in the 1990s and 2000s.
What’s interesting about September is that it’s not usually a down month. Since 1960, it’s finished lower 36 times out of 66, close to a coin flip. What sets it apart is how much it loses when it does. The declines have run deeper than in any other month.
Midterm Years Have Been the Roughest of the Four
Now layer the election calendar on top.
Going back to 1928, the second year of the presidential term has been the weakest of the four by a wide margin. Midterm years have averaged a 3.3% price return with a median of just 0.6%. Only slightly more than half of those years have finished higher. The third year of a term has averaged 14.0%.
The volatility gap is wider still. Since 1960, the average largest drawdown inside a midterm year has been 19.4%. In all other years, it’s been 12.5%.
The typical midterm year spends the whole year underwater, bottoms out about a month before Election Day roughly 6% below where it started, then climbs steadily from there.
Since 1962, every one of the 16 midterm cycles saw a decline between mid-August and Election Day. Not most of them. All of them. The average drawdown was 8.1%, and 10 of the 16 put in their low in October.
I’m not predicting a selloff this year. Past performance is no guarantee of future results, remember. I’m just saying that if we get one this fall, it’ll be the most ordinary thing in the world—a non-event.
This Year Has Real Catalysts, Not Just a Bad Calendar
Seasonality alone doesn’t move markets necessarily. What makes the pattern worth respecting this year is that there are genuine sources of uncertainty stacked into the next few weeks.
Let’s start with the Federal Reserve. July’s Consumer Price Index (CPI) came in at 3.4% year-over-year, down from 3.5% in June, and core CPI cooled to 2.5%. That might sound like relief, but inflation has now run above the Fed’s 2% target for more than five years, and traders are still pricing in a 38% chance of a rate hike at the September meeting.
The inflation picture is not settled either. S&P Global’s July services survey showed the strongest business activity in nine months, but it also showed input costs rising at the fastest pace since May 2025 and the sharpest increase in prices charged for services in 14 months.
Then there’s Congress. Republicans hold 220 House seats to the Democrats’ 215, the thinnest margin of control since 1930. Democrats need a net gain of just three seats to take the chamber. Morgan Stanley’s base case has the GOP holding the Senate while facing real risk in the House. Whatever your politics, that’s a close contest, and markets aren’t known for pricing close contests calmly.
What Happens After the Votes Are Counted
In the chart below, you can see that there’s some good news.
In the 12 months following every midterm election since 1962, the S&P 500 has been higher. Sixteen elections, 16 gains at 14.2% on average. The narrowest was 1986 at just 1.1%, and that 12-month window contained the October 1987 crash. It still finished in the black.
Sixteen observations is admittedly a small sample size, and the stock market has risen over any randomly chosen 12-month stretch about 70% of the time since 1960. A good portion of that record is simply the market doing what it usually does. The midterm effect amplifies a tailwind that already exists rather than creating one.
Why It Comes Back to Policies
If you’re of a certain age, you know that a divided government has been the norm in this country for most of the past 50 years. Those were not bad years for American investors. Presidents Reagan and Clinton both governed with an opposition Congress, and both presided over enormous expansions. Analysts at Commerzbank found the S&P 500 has climbed about 9% a year on average under divided government since 1969, against roughly 5% under unified control.
Capital doesn’t care about party labels. It responds to tax treatment, to regulatory burden, to whether contracts get enforced and property stays protected. Those things aren’t going to flip overnight because of one election.
Earnings Are Stellar, Small Businesses Are Hiring
Let’s look at how U.S. businesses are faring.
According to FactSet, second-quarter earnings have been nothing short of excellent. With 88% of S&P 500 companies reported, 86% beat their earnings estimates, representing the highest share since the second quarter of 2021 and well above the five-year average of 78%. All 11 sectors are growing revenue. Strip out Alphabet and Amazon—which reported massive Q2 income surges—and companies still beat by 10.9%, comfortably above normal.
Small businesses, meanwhile, are voting with their checkbooks. The NFIB Optimism Index rose 2.4 points in July to 99.8, above its 52-year average. A net 20% of owners plan to add jobs over the next three months, the highest since October 2022, and a quarter plan capital outlays in the next six months, the most since December 2024.
Keep Your Head
Warren Buffett, in one of his famous letters to shareholders, warned shareholders that “an unsettled mind will not make good decisions.” I’ve watched that lesson play out for decades now. September may test your patience, and in a midterm year, it tests it even harder. But the votes get counted, the uncertainty clears… and businesses go back to work making money.
Stay invested. Stay diversified. And try not to let the noise between now and November 3 make your decisions for you.
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