by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
The four-year presidential cycle is one of the most widely cited market patterns: returns have historically been stronger in the back half of a term, particularly in the year following midterm elections, and softer in the early years. That general shape does show up in the data. But while the averages follow that pattern, the more interesting takeaway from the chart is how wide the ranges are in every single year. Outcomes span from deep drawdowns to very strong gains regardless of where you are in the cycle, with significant overlap across all four years. In other words, while the framework is directionally correct, it is far from deterministic. Elections can influence the backdrop, but I believe?, or, it seems? they are rarely the primary driver of equity returns in any given year.
If there is a more consistent feature of the cycle, it shows up in the odds rather than the averages. The year following midterm elections has produced a positive 12‑month return roughly 95% of the time since 1930, with the last negative instance occurring decades ago. That consistency stands out relative to other parts of the cycle and suggests a tendency for outcomes to skew positively following midterms, even if return magnitudes remain variable.
There is at least some intuitive explanation for this pattern. The pre‑midterm year tends to coincide with rising uncertainty - visible in measures like the National Financial Conditions Index “risk” component, which captures stress across credit, funding, and volatility - and that uncertainty likely begins to recede once midterms pass. Some of that may reflect the policy cycle itself: the first half of a presidential term is often when new and more differentiated policy agendas are introduced and absorbed by markets, while the back half tends to be more incremental.
Layered on top of that, elections frequently result in a shift in the balance of power - since 1980, roughly 70% of midterms have resulted in the party in power losing ground, leading to a shift toward more divided government. That transition, on the margin, has historically been modestly supportive for equities, likely because it implies fewer major policy shifts and a more stable set of “rules of the road.” Still, the signal is modest. As we approach the midterms this fall, it would be well within historical precedent to see a shift back toward divided government, which could provide a small tailwind via lower policy uncertainty into 2027 - but that is unlikely to outweigh the broader drivers of the market we have been focused on, particularly how early it seems we are in the earnings cycle.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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