319: Will the 2026 Midterm Elections Crash the Stock Market?

[00:00:45] Hilary Hendershott: Every election year, investors start asking the same question: What happens to my money if the wrong people win? And every election year, financial commentators confidently explain which political outcomes will be good or bad for the stock market, usually focusing on the bad. But there’s something you should know.

[00:01:05] History tells a very different story from what most political commentators would have you believe, and some of the most expensive investment mistakes happen when people confuse their political convictions for financial decisions. Let’s start with the question everyone asks. Are Republicans or Democrats better for the stock market?

[00:01:28] You can find plenty of headlines and charts claiming that one or the other political party winning means the stock market is gonna go up or down. But when we look at the historical data, the relationship is not simple. According to research published by Dimensional Fund Advisors, 14 of the 17 presidential terms they examined, starting in 1929, were associated with positive stock market returns, and those positive returns occurred under both Republican and Democratic administrations.

[00:01:59] Think about that for a minute. These are times with different presidents, different tax policies, different economic conditions, wars, recessions, and major political disagreements. And through all that, businesses have continued to operate, innovate, and pursue profits, which usually translates to a rising stock market.

[00:02:20] Now, that doesn’t mean elections don’t matter. They absolutely can. Changes in tax policy, regulation, trade, and government spending can influence the value of businesses and therefore stocks. But there’s an important distinction between knowing that something matters and how those things will change and how to profit from the changes, and that’s where investors can get themselves into trouble.

[00:02:45] Let’s look specifically at midterm elections, because that’s what’s coming up in November. Historically, midterm election years have produced somewhat lower average stock market returns than other years. Looking at S&P 500 data going back to 1926, Dimensional cited an average return of approximately 7.5% during midterm election years.

[00:03:06] But here’s where it actually gets interesting. The average return in the calendar year following a midterm election was approximately 18.8%. So, does that mean you should wait until the election is over and put your money into stocks? Absolutely not. Those are historical averages. They are not predictions.

[00:03:26] We’re talking about a relatively small number of elections spread out over nearly a century, and every one of those years had its own economic circumstances. Interest rates, inflation, corporate earnings, global events, and countless other factors were influencing the stock market at those times. We can’t isolate just one midterm election, and it’s a mistake to assume that election caused the stock market returns we saw afterward.

[00:03:54] We certainly can’t count on the next election following the same pattern. That’s one of the traps investors can fall into: finding a pattern in historical data and assuming it gives them a reliable way to predict what happens next. For example, did you know 30 years ago, the Super Bowl winner had a history of predicting whether the stock market would go up or down that year with 90% accuracy?

[00:04:20] Not surprisingly, it stopped working in 1997 because it was never about anything being predicted. Rather, it was simply an association. Super Bowl winner led to the stock market going up or down. People call it a prediction, but it never actually was. And that brings us to an even bigger challenge. The stock market does not wait until election day to start thinking about the election.

[00:04:48] That’s the part most people miss. Investors are constantly evaluating polls, policies, economic conditions, and potential outcomes, but those expectations are already influencing stock prices. So, when an election result comes in, the question isn’t really whether a particular party won. It’s whether the outcome was different from what investors were already expecting.

[00:05:14] Let’s say you correctly predict that a particular candidate or political party will win. You might also correctly predict that certain tax policies or regulations will change, but that still doesn’t tell you how stocks will respond. Why? Because markets are reacting to new information all the time.

[00:05:32] Here’s a great example. In November 2020, investors were watching a closely contested presidential election, but during that same period, Pfizer and BioNTech were announcing promising results from their COVID-19 vaccine trial. That news had major implications for the economy and for financial markets.

[00:05:52] Imagine making an investment decision based entirely on the election while overlooking something else that could have had an enormous impact on stock prices. That’s the challenge with trying to time the market. You don’t have to be wrong about politics to be wrong about your investments. You can get the election right and still get the market completely wrong.

[00:06:13] And this is where I think investors need to be especially careful. Elections can be emotional. People have strong feelings about candidates, political parties, and the direction of the country, and those feelings are completely understandable. But your political beliefs and your investment strategy serve two very different purposes.

[00:06:33] Your vote is an expression of what you want for the country. Your investment portfolio is designed to help fund your future. Those decisions shouldn’t be tied together. It’s easy to become convinced that a particular political outcome will be disastrous for the market, and sometimes that fear leads investors to consider selling investments, moving into cash, or making significant changes to their portfolios.

[00:06:59] Investing based on fear is a consistently losing proposition. Think about what has to happen for that strategy to work. First, you have to correctly anticipate the election outcome. Then you have to correctly anticipate how the market will respond. And finally, you have to know when to get back into the market.

[00:07:20] That’s a lot of things you have to get right, and making those decisions based on fear or political conviction can create unnecessary trading costs, missed opportunities, and potentially significant tax consequences. Your vote is about the future you want for the country. Your investment portfolio is about the future you want for yourself and your family.

[00:07:40] Don’t let your politics interfere with your financial plan. And if you’d like a team helping you make thoughtful investment and tax decisions regardless of what’s happening in Washington, click the link below to schedule a complimentary conversation with Hendershott Wealth Management.