Carve a boat that has almost never been turned — Historical patterns of the U.S. stock market in midterm election years

There are less than four months until the midterm elections. I wrote about the relationship between midterm elections and risk markets in 2022, but unfortunately I can't find it now. However, that does not prevent me from carving this boat again, which has almost never been turned in history, regarding the impact of midterm elections on risk markets.

The first data:

Since 1930, if there are more than 10 trading days in a year with single-day fluctuations exceeding 2%, the average annual return of the S&P 500 is only -1.2%. However, if the number of such volatile days does not exceed 10, the average annual return can reach 19.4%.

The second data:

In the 24 midterm election cycles since 1930, from December of the election year to March of the following year, the S&P 500 has an average increase of 7.2%, with a median increase of 7.9%. Among these, there were 21 increases and 3 decreases, with an increase probability of 87.5%.

So overall, midterm elections tend to be favorable for risk markets. Wall Street has previously calculated that the average maximum drawdown of the S&P 500 in midterm election years is about 19%, while in other years it is about 13%. The average increase from the low point in midterm election years to the following year is about 32%.

This indicates that there may be a larger pullback in midterm election years, but the rebound after the midterm elections will be even more intense.

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