There’s a stock market trend that I really look forward to every four years, and it’s happening again this fall: midterm elections. They often lead to gridlock — and, honestly, that gridlock can trigger a nice bull run afterward.
It’s true that congressional midterms typically result in a legislature that struggles to get much done. While this might not be ideal for those in power, historically, it tends to set off a consistently positive nine-month cycle for both U.S. and international stocks.
Things usually kick off in October, so try not to let the usual noise about inflation, oil prices, and global conflicts distract you from what could be an exciting time in the markets.
My optimistic outlook for 2026 highlights that major, contentious legislation tends to emerge in the first two years of a presidency. Presidents are aware that their influence wanes post-midterms and often rush to push their most significant bills during that initial period. This trend is pretty consistent.
Stock prices can be volatile during this time. Major legislative actions tend to create winners and losers, which increases political uncertainty and risk aversion. Historically, the first two years of a presidency have seen positive stock performance about 60% of the time; it’s decent, but not stellar.
The second year of a presidency also brings midterm campaigns. All the extreme rhetoric makes waves as candidates aim to energize their bases for primaries — which can unsettle investors. This might explain why the S&P 500 has shown positive returns in only 46%, 58%, and 60% of the first three quarters during midterm years, respectively, as noted until this past June.
When the midterms do hit, the trend is clear. Since 1914, following the 17th Amendment that mandated direct Senate elections, the president’s party has lost House seats in 89% of midterm elections, averaging about 30 seats lost. In Senate races, the party has lost seats 71% of the time, averaging four seats lost. Just one chamber flipping can lead to increased gridlock.
True stock performance data start from 1925. Since then, the S&P 500 has generally risen in 84% of Q4s in midterm years and has surged in 92% of the nine-month periods beginning with those quarters, averaging an impressive 19.8% gain.
This trend usually strengthens as a president enters a lame-duck phase. Because stock markets around the globe tend to correlate, these effects are felt internationally too. In all ten nine-month episodes since reliable foreign data became available, international markets have never shown an overall loss.
Whatever the political outrage may be from either side, it’s important to view it through the lens of the stock market: gridlock tends to be favorable.
Political affiliation doesn’t really matter in this scenario, nor does how stocks performed earlier in the year. The reason for this is somewhat psychological; we often convince ourselves that disaster looms if our preferred party loses power. This mindset includes both domestic and international investors.
However, the subsequent quiet in legislation often brings unexpected positive outcomes for stocks, as previously discussed back in November 2022. For instance, the S&P 500 jumped 26% from the start of Q4 2022 through the end of Q2 2023, even with weaker market conditions entering October.
Currently, there’s a lot of chatter about extremes, like the rise of progressive candidates or Trump’s outlandish proposals. But, try to set aside the noise of discontent. Just like the markets have shown, gridlock can actually be a good thing.
The Republicans currently have slim majorities in both houses of Congress. Thanks to gerrymandering from both parties, very few House seats are genuinely competitive — maybe around 25 could be seen as in play, impacting the near-evenly split chamber. In the Senate, only seven seats are true toss-ups, with Republicans holding a slight three-seat advantage.
What’s striking is that this “miracle” of gridlock can occur even if neither chamber switches control. For example, losing just a single House seat and two Senate seats would still create more gridlock, allowing Republicans to maintain technical control of both chambers while contentious legislation remains stalled. This sort of legislative calm tends to grow in significance as a president completes their final term — especially as some Republicans start to re-evaluate their positions post-election.
Over the next few weeks, expect the political rhetoric to reach a boiling point as campaigns intensify. But don’t be alarmed. Stocks will eventually start responding to the anticipated ease in political risk, and as that legislative silence settles in, we might just witness the beneficial effects that gridlock brings to the stock market.
