While political campaign season reliably floods the airwaves with warnings about existential stakes, Confluence Investment Management's Thomas Wash trains his attention on a more durable signal: the relationship between the presidential election cycle and equity market performance. In his November 2, 2026 Asset Allocation Bi-Weekly1, Wash builds a methodical historical case that the third year of any president's term has consistently produced the strongest equity returns of the four-year cycle, and that the current political configuration may be setting the table for a similar result heading into 2027.
A Century of Third-Year Outperformance
The historical record Wash presents is both long and consistent. From 1930 to 2023, third-year equity returns led all four years of the presidential cycle, with the gains most concentrated in the stretch immediately following midterm elections. Measured from the start of the election year through the end of the third year, the S&P 500 rose 38.3% under Republican presidents versus 36.2% under Democratic ones. That margin is meaningful, but the more telling feature is the underlying pattern: Republican administrations typically trail in their first two years, only to see a sharp third-year rebound. The post-midterm window is where the cycle turns.
The Mechanism: Predictability Over Partisanship
Wash is clear that ideology is not the operative variable. The driver of third-year strength is policy predictability, and the mechanism that produces it is legislative gridlock. The party that lost the prior presidential election tends to reclaim congressional seats at the midterms, drawing energy from a frustrated base. When that opposition party gains control of Congress, it constrains the administration's most ambitious policy agenda and pushes both sides toward negotiation.
Two recent examples anchor the argument. The 2022 midterms delivered a split Congress that reined in Democratic spending expansion and eased investor anxiety over deficit trajectories. The 2018 midterms produced divided government that, by 2020, yielded bipartisan economic relief packages during the pandemic. In both cases, institutional friction generated more balanced and market-friendly outcomes than unified control would have produced.
The 2026 Midterm Setup
As of early November 2026, Polymarket data assigns more than an 80% probability to Democrats winning control of the House. Prediction markets also favor a Democratic Senate takeover, though Wash notes that polling data suggests those contests may be considerably closer. Whether Democrats claim one chamber or both, the result would represent a material shift away from the unified Republican control that has characterized the past two years.
The policy implications diverge by scenario. A Democratic House alone would focus pressure on the federal deficit, compelling both parties to negotiate a budget framework to avoid a government shutdown. A full Democratic sweep would extend that friction into national security, trade, and AI governance, forcing the White House into closer legislative coordination. Both outcomes, Wash argues, would reduce the market uncertainty that has constrained capital deployment outside the AI sector.
Why 2027 May Follow the Script
Wash observes that "policy becomes far more predictable" in a president's third year, a dynamic he identifies as especially consequential for the current environment. He acknowledges that the Bush administration's third-year data was distorted by the onset of the subprime mortgage crisis in 2007, but notes that second-term Republican administrations have otherwise delivered the strongest third-year market gains of the historical record. With fluctuating trade, fiscal, and foreign policies having already created sustained price volatility, legislative gridlock could do significant work in broadening capital deployment beyond AI into the wider market.
The Broader Catalyst
A more balanced Congress driving bipartisan cooperation, Wash concludes, should act as a key market catalyst. That environment, paired with lower interest rates supported by easing geopolitical tensions and more disciplined fiscal management, should create the conditions for businesses to capitalize on the AI infrastructure buildout and expand investment across sectors.
5 Key Takeaways for Advisors and Investors
- The third-year effect is durable, not theoretical. Data from 1930 to 2023 consistently identifies the third presidential year as the strongest for equities, making 2027 a historically favourable setup worth positioning for.
- Gridlock is the engine, not a side effect. Policy predictability, generated by divided government, explains third-year outperformance more than partisan ideology. Reduced risk of unilateral policy shifts improves business planning visibility.
- Midterm shift carries high probability pricing. Polymarket odds above 80% for a Democratic House suggest markets may already be beginning to reprice toward legislative balance. Advisors should consider whether portfolios reflect this shift.
- Capital deployment constraints may ease beyond AI. Volatility from unpredictable trade and fiscal policy has concentrated investment in AI-adjacent sectors. A more stable policy backdrop could broaden the opportunity set meaningfully.
- Fiscal and rate tailwinds may amplify the cycle. Lower rates supported by easing geopolitical tensions, combined with deficit discipline under a divided Congress, could strengthen the third-year rally relative to historical averages.
Footnote:
1 Wash, Thomas. "Asset Allocation Bi-Weekly: The Third-Year Charm: Why Gridlock Sets the Stage for Market Growth." Confluence Investment Management, 2 Nov. 2026, https://www.confluenceinvestment.com/asset-allocation-bi-weekly-nov-2-2026/.
