Dear Reader,
I’ve been asked all summer what happens to the stock market after a midterm election.
I’ve pulled out my old research and I’m going to walk you through it.
The answer is going to surprise you.
The Historical Record
Let’s start with the broadest fact.
Since 1950, the S&P 500 has delivered a positive return in the 12 months following every single midterm election.
Every one.
The average gain is about 15%.
Go back further to 1874 — when America finished stitching together the continent after the Civil War and went back to the business of business — and the S&P 500 rose in the 12 months following 84% of midterm elections, with an average return of about 14%.
I went back to 1874 specifically because that era is comparable to what we’re living through now.
The railroad build-out of those decades was similar in percentage of GDP to our AI build-out today.
History rhymes.
And right now it’s rhyming in a way that should make investors feel better.
Why the Market Rallies After Midterms
The explanation is straightforward.
Markets hate uncertainty.
During election season, investors are revving at 4,500 RPMs instead of their normal 3,000.
Nonstop messaging. Nonstop anxiety.
Once the votes are counted and the political layout of Congress is known, a massive amount of uncertainty evaporates overnight.
Investors shift their focus back to economic fundamentals.
And right now, despite some clouds forming on the horizon — which I’ll be talking about in the days ahead — the fundamentals remain reasonably strong.
The Divided Government Bonus
Here’s something the data shows very clearly.
Markets actually like divided government.
I know I do.
The Founding Fathers designed the system this way on purpose.
If you’ve read The Federalist Papers — Hamilton, Madison, and Jay writing under the name Publius, a reference to the great Roman statesmen who helped build the Roman Republic — you’ll understand what they were trying to do.
They studied Athens.
They saw what happened in a direct democracy where any demagogue could steer the country wildly left or right.
So they designed the Senate with six-year terms specifically to act as a brake on the passions of the House.
They wanted big changes to require massive consensus.
People always complain that Washington can’t get anything done.
That’s actually the point.
The numbers back this up.
According to data from Horizon Investments going back to 1950, in the eight midterm elections where the president’s party lost control of at least one chamber of Congress, the S&P 500 delivered positive returns 100% of the time — averaging 12.8% in the following 12 months.
Extended data compiled since 1874 tells the same story.
Divided government under a Republican president has occurred 14 times.
The market was positive 93% of those times in the following year.
Divided government under a Democratic president has occurred nine times since 1874.
The market finished higher eight out of those nine instances.
The Honest Caveat
I will never be the kind of person who whistles past the graveyard.
Historical averages are historical averages.
They’re from the past.
The picture is getting more complicated — rates where they are, housing slowing, some clouds forming that I’ll be addressing in the days ahead.
None of that disappears because of a historical pattern.
But the general consensus is clear.
Midterm elections — divided government or not — have proven to be a very strong tailwind for the S&P 500 in the quarter and the 12 months that follow.
That’s the history.
We’ll see if it holds.
The market likes what happens after midterms.
So do I.
But the best investors aren’t just waiting for the post-election rally.
They’re positioned in the companies that get paid no matter what happens next.
Here’s one Congress knows very well.
Lawmakers hauled it in front of a hearing in May 2019 — and again in early 2022.
They read the prices of its small aircraft parts into the record and dared the executives to defend them.
Since then, at least six members of Congress have bought the stock — more than a dozen separate purchases, all publicly filed.
Here’s why.
Its parts fly on nearly every commercial and military aircraft you’ve ever seen.
When the Pentagon’s auditors examined 47 of those parts, 39 had no other producer anywhere on Earth.
No part, no plane.
Through the 737 MAX grounding and a pandemic that parked the world’s fleet in the desert, it got paid on nearly every plane, every year — no matter who was winning.
And since 2009, it has mailed shareholders twelve special dividends — $394.50 per share, all told.
That’s the kind of business that doesn’t need to know who controls the House.
I’ve put together the full story — including the company’s name and ticker, free of charge.
Have a good day.
I’ll see you tomorrow.
“The Buck Stops Here,”
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Written by Dylan Jovine