Stocks Usually Rally After Midterm Elections. So What Happens This Time?

Wall Street loves a historical pattern.

Sell in May. Buy the dip. Don’t fight the Fed.

And every four years, another familiar statistic makes the rounds: stocks almost always rally after midterm elections.

This time, investors have a particularly interesting test of that theory.

Following the November 3 elections, stocks initially surged. The S&P 500 gained roughly 1.6% on November 4, while the Dow jumped approximately 3%, according to the Associated Press, but the celebration didn’t last.

Technology stocks subsequently weakened, inflation concerns resurfaced, and investors began reconsidering how much the Federal Reserve might raise interest rates.

So was the post-election rally a false start?

Not necessarily. But it illustrates why historical market averages deserve a closer look.

The Midterm Rally Is Real History

According to Fidelity’s analysis of midterm elections, the S&P 500 has recorded positive price returns in approximately 95% of the twelve-month periods following midterm elections since 1938. 

That’s a remarkable historical record, and it’s easy to understand why investors find it appealing. 

Elections create uncertainty about taxes, spending, regulation, and the direction of economic policy. Once the votes are counted, some of that uncertainty disappears. Businesses can make plans. Investors can reassess risks. Markets no longer have to price as many possible political outcomes.

But here’s the problem, a historical pattern isn’t the same thing as a causal explanation. Just because stocks frequently rose after elections doesn’t mean the elections caused the rallies.

What Else Was Happening?

Consider how many things influence stock prices over twelve months; corporate earnings change, interest rates move, oil prices rise and fall, recessions begin and end, investors become more or less optimistic.

The National Bureau of Economic Research maintains the historical record of U.S. business-cycle peaks and troughs. Compare those dates with election years, and it becomes obvious that politics aren’t the only force moving markets.

A post-election rally could coincide with the economy recovering from a recession, but it could also coincide with the Fed cutting rates, or corporate profits increasing.

None of those developments requires a midterm election to occur.

BlackRock’s research on election-cycle investing makes a related point: investors who let political preferences dictate whether they stay invested can sacrifice substantial long-term returns. The market doesn’t reward investors simply for supporting the winning party.

An Election Doesn’t Pay the National Debt

There’s another reason to be cautious about treating election results as an economic cure; the United States still has to finance its government.

Congress can change tax laws and spending priorities, but existing Treasury obligations don’t disappear when voters change the composition of Congress. Neither does the cost of servicing that debt. 

The scale of federal borrowing is the largest deficit since the pandemic. The concern isn’t necessarily which party controls Washington, it’s whether future spending, tax revenue, and borrowing costs are consistent with a sustainable fiscal path.

If investors become less willing to lend to the Treasury at existing yields, borrowing costs can rise. That affects mortgages, business loans, and equity valuations. Schiff has warned about this dynamic in his discussion of rising bond yields and federal debt. An election may change the people writing the budget, but doesn’t change the arithmetic.

The Fed Still Has a Vote

Another complication is monetary policy, the November inflation report showed consumer prices rising faster than expected, renewing concerns about another interest-rate increase. Higher rates can pressure stock valuations regardless of which party controls Congress.

A technology company expecting rapid future growth doesn’t become immune to higher borrowing costs because an election has concluded.

And a household shopping for a mortgage doesn’t get a lower rate simply because the market historically rallies after midterms.

SchiffGold has argued that nominal market gains can conceal broader purchasing-power problems. That distinction matters here. A rising S&P 500 is welcome news for shareholders. But if inflation remains elevated, the real value of those gains may be smaller than the headline suggests.

What About Gold?

Gold investors face a different calculation. Political uncertainty can support demand for bullion, but so can concerns about debt, inflation, and currency purchasing power. A clearer election outcome might reduce one source of uncertainty while leaving the others intact.

SchiffGold has discussed that broader relationship in its examination of the dollar, monetary policy, and demand for gold. Gold isn’t guaranteed to rally after elections, just as stocks aren’t.

Both respond to economic conditions that extend well beyond Washington. The historical midterm pattern is worth understanding. It may even offer useful perspective when markets become volatile, but investing based on the calendar alone mistakes correlation for a strategy.

The election is over, the economy, the Fed, and the national debt are still here. Those are the variables that will ultimately matter more than the date on the ballot.