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SUMMARY
Joe Brown, a former stock broker and financial educator, examines the historical performance of the S&P 500, Nasdaq, and Russell 2000 during the four months leading up to and the six months following every midterm election since 1998. He finds that claims of inevitable stock market crashes before midterm elections are not supported by historical data, highlighting the variability and resilience of market returns across cycles.
MAIN POINTS
- Charts of every midterm cycle since 1998 reveal varied market behavior, including both gains and losses before elections.
- Analysis of best and worst four-month returns shows significant volatility, with some cycles producing large gains and others steep losses.
- Discussion of how bull markets typically end, emphasizing that fear rarely causes major tops and that current sentiment is not euphoric.
- Review of six-month post-election returns demonstrates that markets have historically rebounded strongly after midterms, with only rare exceptions.
- Final advice encourages long-term investors to view market dips as buying opportunities, based on the broad range of historical outcomes.
DETAILED ANALYSIS
A comprehensive review of U.S. stock market performance during midterm election cycles over the past three decades reveals that the widely held belief in an inevitable pre-election crash is not substantiated by historical evidence. The analysis covers the S&P 500, Nasdaq, and Russell 2000 indices, focusing on total returns in the four months leading up to each November midterm since 1998. Visual and numerical data from each cycle show a wide range of outcomes: some periods experienced significant declines, such as the 1998 and 2002 cycles, while others, like 2006 and especially 2010, saw remarkable gains with the S&P 500 returning up to 17.5% and the Nasdaq over 21% in just four months.
More recent cycles, including 2014, 2018, and 2022, produced mixed results, with modest gains or losses, further illustrating the absence of a consistent pre-election pattern.
Averages for the four-month pre-election window—2.69% for the S&P 500, 2.26% for the Nasdaq, and -1.1% for the Russell 2000—rarely reflect actual year-to-year outcomes, as market returns tend to be distributed across a broad spectrum rather than clustering around the mean. The data also highlight that new extremes can always be set, and past records do not cap future possibilities. Projections based on historical best, worst, and average scenarios suggest that while the S&P 500 could theoretically fall to around 6,890 or rise to 8,700 by the next election, such precise outcomes are unlikely, and the consensus expectation of a sharp decline is probably misplaced.
The analysis further explores how bull markets end, noting that they typically do not die from fear or overvaluation but rather from widespread euphoria when all potential buyers have already entered the market. Current conditions do not indicate such sentiment, implying that while volatility or short-term declines are possible, a major top is not imminent. Looking beyond the election, the six months following midterms have historically been strong for equities, with average returns exceeding 10% for the S&P 500, 15% for the Nasdaq, and 8% for the Russell 2000.
Even the worst six-month post-election performance for these indices has been relatively mild, with only the Russell 2000 experiencing a slight decline of 2.2%.
By mapping all nine possible combinations of pre- and post-election best, average, and worst-case scenarios, the data show that only one outcome leads to a lower S&P 500 ten months after the pre-election period, while most scenarios result in gains, sometimes substantial. The conclusion drawn is that, unless an investor has an extremely short time horizon, market dips around midterm cycles should be viewed as buying opportunities rather than signals to exit. The historical record supports a disciplined, long-term approach, and while extreme moves are always possible, the prevailing narrative of an inevitable crash before midterms is not grounded in the facts.
LINKS
- Free Portfolio Stress Test and custom investment blueprint.
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- List of recommended books by Joe Brown.