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SUMMARY
Joe Brown, former stock broker and host of Heresy Financial, analyzes the historical performance of the stock market following U.S. midterm elections, emphasizing that markets tend to rally regardless of which party wins. He outlines current economic risks, draws parallels to previous cycles, and discusses the potential for financial repression as governments address rising debt and inflation.
MAIN POINTS
- Historical data over 75 years shows the stock market typically rises after midterm elections.
- Despite positive averages, current market uncertainty is driven by seven major economic and geopolitical risks.
- Analysis of past midterm cycles identifies 2018, 1974, and 2006 as the most similar to the present environment.
- In 2018, despite a short-term decline after midterms, the market recovered as the Federal Reserve shifted policy.
- Markets generally perform better after midterms due to reduced uncertainty, as investors prefer predictable conditions.
- Concerns about financial repression and capital controls are highlighted as potential post-election risks.
DETAILED ANALYSIS
An examination of the last 75 years of U.S. stock market performance reveals a consistent pattern: markets tend to rise following midterm elections, regardless of which political party gains control. On average, the S&P 500 has increased by 8% three months after midterms, 14.5% after six months, and 15.5% after one year. The worst one-year post-midterm return was still positive at 1.3%, while the best reached 33%.
Only two instances in the past 75 years saw the market decline in the three months following midterms—2002 under President Bush and 2018 under President Trump—with the latter experiencing a modest 2% drop.
Despite these reassuring averages, the current environment is marked by significant uncertainty. Seven key issues are identified as major sources of risk: rising inflation (3.7% in September 2026, up from 3% a year prior), rapidly increasing yields on long-term Treasury bonds (10-year yield over 5%), ongoing Federal Reserve rate hikes (target range 3.75-4%), surging oil prices (over $100 per barrel), escalating conflict in the Middle East, high probabilities of Congressional power shifts, and ballooning federal deficits (annual deficits of $2 trillion and national debt exceeding $40 trillion). Interest payments on the national debt now represent the second largest line item in the federal budget, surpassing spending on Medicare, health, and defense.
To contextualize the present, a comparison is drawn with previous midterm cycles. The cycles most similar to today are 2018 (Trump), 1974 (Ford), and 2006 (Bush), each sharing multiple economic and geopolitical parallels. In 2018, the Federal Reserve was raising interest rates, 10-year Treasury yields were climbing, oil prices were surging, and sanctions on Iran were reimposed.
The House of Representatives flipped parties, and federal deficits were rising. Despite a short-term market decline after the 2018 midterms—largely attributed to aggressive Fed tightening—the market rebounded as soon as the Fed signaled a policy pivot, finishing up 7% at six months and 12% at one year.
The 1974 and 2006 midterms also saw markets rise in the months following the elections, though the 2006 gains were muted by the onset of the financial crisis. These historical precedents suggest that, even amid serious challenges, markets often recover as uncertainty diminishes post-election. Investors and businesses prefer certainty—even under adverse policy conditions—because it allows for more confident planning and investment.
This reduction in uncertainty is a key driver behind post-midterm rallies.
A further risk highlighted is the potential for financial repression, as discussed in a recent International Monetary Fund paper. Financial repression refers to government measures that effectively lock citizens into the domestic financial system and use inflation to reduce the real value of public debt, often through capital controls and regulatory barriers. The concern is that, following the midterms, policymakers may accelerate efforts to implement such controls, limiting individuals’ ability to protect their wealth from inflation and debt monetization.
The analysis concludes that while historical trends favor a market rally after midterms, current risks—especially those related to government debt and potential financial repression—warrant close attention.
LINKS
- Free training on financial repression and protecting wealth.
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