Archie Ponce, CFP®, Executive Vice President
(00:00) Welcome everyone, and thank you for taking the time to join me today for our webinar, Markets and the Midterms: What Investors Need to Know. My name is Archie Ponce, and I serve as Executive Vice President and a managing partner at Optima Asset Management. I began my career in financial services 29 years ago, working across several firms in a variety of roles before joining Optima more than 19 years ago. Today, I’m going to discuss the markets and the midterm elections.
(00:28) First, a brief disclaimer.
(00:30) The information provided on this webinar is for educational and informational purposes only. It’s not intended to serve as political commentary, political predictions, nor does it constitute individualized investment advice. Our discussion today revolves around the impact of the midterm general elections, the political uncertainty it causes, and what history has shown us during these periods on the financial markets. In the year of the midterm elections, and the following 12 months after the elections, what investors tend to worry about during the election cycles, and the inherent challenges to separate the political headlines from both investment and economic fundamentals. And finally, what investors should consider with their investments.
(01:13) What are the midterm elections and what is at stake? The midterm general elections is the period that falls at the two-year mark between the presidential general election. This year, it’ll be held on November 3, 2026. The election will allow voters the opportunity to determine which political party controls both the House of Representatives, the Senate, and of course other state and local races across the country. During this year’s midterm elections, voters will elect all four hundred and thirty-five members of the House of Representatives, 35 of the Senate’s 100 seats, including 33 regular elections and two special elections, 36 gubernatorial races, and a number of other local and state races.
(01:58) Heading into the 2026 general elections, Republicans control both chambers of Congress. They hold a 53 to 45 majority in the Senate, while two independents caucus with the Democrats, effectively giving Democrats 47 votes for organizational purposes. Republicans also hold a majority of the House seats 220 to 215. Democrats need a net gain of 30 seats to take control of the House of Representatives, while they need a net of four seats to gain control of the U.S. Senate. Historically, the parties controlling the White House tends to lose congressional seats in the midterm elections, increasing the likelihood of a divided government.
(02:39) Why this is important is because of the potential effects on the economy. The House and Senate form legislative branch of government. They have a shared responsibility for making and passing federal laws such as revenue and tax bills, drafting the federal budget, allocating government funding to federal agencies, dealing and imposing tariffs, though it has historically delegated limited tariff powers to the executive branch and other regulatory changes to name a few.
(03:09) The markets pay close attention to Washington because changes to those fiscal policies can influence economic growth, corporate profitability, and impact certain industries and companies with those policy changes. Both the President and Congress are the key decision makers of fiscal policy, which determines government spending and taxation to influence economic conditions. Monetary policy is controlled by the Federal Reserve to manage money supply and set key interest rates.
(03:39) To help fulfill a congressional mandate known as a dual mandate, promoting maximum employment and maintain stable prices as measured by inflation. A key point is the Federal Reserve’s independence in setting monetary policy without direct political interference from elective officials. The combination of monetary and fiscal policy are tools used to help stabilize the national economy. The potential change to those who create various fiscal policies introduces uncertainty, which in turn causes greater volatility in the market.
(04:12) How does the markets typically react during the midterm elections? While past results do not guarantee future outcomes, understanding the history during the midterm election cycle can help provide some insightful guidance. Historically, during the US midterm election years, we see increased volatility, larger drawdowns, and lower average returns. In the shorter term, as the political news cycle heats up, the closer it gets to election day, political rhetoric increases with the emotional appeals made to targeted voters. The mix of political uncertainty with potential changes in policy expectations on the broader economy increases investor uncertainty, which in turn causes volatility to increase.
(04:57) What is the impact on market volatility before and after elections? Historically, US midterm election years are the most volatile phase of the four-year presidential cycle.
(05:09) During midterm election years, the average intra-year drawdown in the S&P 500 is between a drop of 17.5 to 18.2% peak to trough going back several decades. Whereas for non-midterm years, the intra-year average drop peak to trough is minus 13%. The CBOE, often referred to as the VIX, shows that volatility is higher 80% of the preceding year, rising an average of 3.5 volatility points since 1945.
(05:37) Currently, for 2026, the VIX as of this recording is at 17. In mid-August, it was 14.2. A value below 20 signals a calm market and lower investor fear. The long-term average of the VIX is between 19 and 20. Historically, in periods between September to election day, the VIX typically breaks out with a sharp seasonal run, with the median volatility climbs from 17.5% in August, 19% in September, and 24.5% in October, before the post-election drop in the VIX.
(06:08) Earlier this year, the stock market did experience higher volatility driven by the Middle East conflict, rising energy prices, and a continued elevated inflation, and has since dropped to its current level. Looking at the S&P 500 returns during the midterm years, the S&P 500 has averaged an annual return of 4 to 4.7%, which is below the average for all years between 10 to 13%. During the first three quarters of past midterm election years, the S&P 500 experienced a drop of 0.9% on average. In comparison for the first three quarters of 2026, the S&P 500 was up 12.06%, well above the average of past midterm election years. As mentioned earlier, past results do not guarantee future outcomes.
(06:55) How have investors reacted to uncertainty? There’s a term called confirmation bias, which can lead investors to focus on the latest news and letting their political feelings dictate their portfolio, especially if the investor has a strong emotional view of a particular political candidate or party, looking for information that confirms their existing beliefs, and ignoring data like strong corporate earnings, consumer spending, or other economic numbers that contradicts that feeling. Another reaction is loss aversion, in which political anxiety and fears cause investors to panic sell.
(07:35) In order to reduce losses and protect their investments, financial markets pay close attention to Washington because federal policies, fiscal spending, and regulatory decisions can impact corporate profits, borrowing costs, and economic growth. However, with increased speculation due to uncertainty, it does drive short term market movements by betting on price changes rather than long term value.
(08:03) The market returns ultimately will be driven by the economy, corporate profits, inflation, and interest rates rather than which political party wins.
(08:14) What about the post-election years? While the returns during midterm years are lower on average, what we have seen in the following year post-election is that the S&P 500 experiences a relief rally with an average gain of 12.4 to 15.4%. History shows that it doesn’t matter to the stock market which party dominates in the midterms. It tends to rally after the uncertainty gets resolved.
(08:41) Volatility typically subsides within 30 to 60 days post-election.
(08:46) As previously mentioned, year to date, the stock market returns have so far been much stronger than historical patterns, with concern that the typical after-election year rally is already getting priced in. Fortunately, there is no strong historical data that shows that typical post-midterm stock rally is dependent on weakness in the midterm year. In fact, during the 1998 midterms, it was exceptionally strong, and in the following 12 months following election day, the S&P 500 gained 22%.
(09:19) The markets and economy are unpredictable, and no one can predict what will happen over the next twelve months. But we know historically how the markets have performed in the post election year.
(09:30) Let’s now take a look at a few different scenarios as it relates to the House and Senate race results. Again, I want to reiterate: with each scenario, we cannot predict how exactly the markets will respond post-election over the next 12 months.
(09:46) Scenario A, the status quo, in which Republicans retain control of both the House of Representatives and the Senate.
(09:53) A retained majority would likely ensure a continued push for federal deregulation and reduction in corporate red tape, which would positively impact certain industries. More tax predictability regarding the One Big Beautiful Bill Act passed in 2025, which will likely result in at least keeping certain provisions, such as the existing capital gains and corporate tax brackets, and reduce the chances of early rollbacks or major legislative changes before they’re scheduled to sunset in 2028 and 2029.
(10:26) If midterm election results maintain the political status quo of a Republican majority in the House and Senate, the likelihood result is lower uncertainty. Markets dislike the unknown. When an election ends and the status quo leaves the legislative balance clear, the political clouds lift. The bigger driver is the reduction in certainty rather than which political party is in control or in this case stays in control.
(10:53) Scenario B.
(10:55) A shift in congressional control. The president’s party almost always loses ground in midterm House elections, as has happened in 20 of the past 22 midterm elections, stretching back to 1938, increasing the likelihood of a divided government. From a market perspective, a divided government can result in legislative gridlock, which can reduce the probability of sweeping policy changes, making the environment easier and providing policy stability for businesses and investors to assess. Changes in congressional leadership can impact negotiations on fiscal matters, affecting current policy and increasing legislative debates such as spending or the debt ceiling. Shifts in committee leadership can lead to increased congressional oversight or hearings for specific industries, which can influence sector-specific market movements.
(11:52) Control of the Senate matters because it determines the confirmation environment for judges, regulators, senior administration officials, as well as the viability of major legislation.
(12:04) News coverage can make proposed policies sound like settled law. However, in practice, most sweeping policy proposals are diluted, stalled in committee, or blocked by the checks and balances built into the legislative process.
(12:18) is the perception when one political party gets into office that there will be immediate and sharp impact on certain companies, sectors, or the economy. However, even when there is a significant policy that gets passed, the actual impact on corporate balance sheets takes 12 to 24 months to materialize. Moreover, clarity around these policies gives companies, markets, and investors time to assess their implications and adjust accordingly.
(12:49) Lastly, scenario C. What if there is an unexpected election outcome, such as unresolved or delayed election night results, an upset, or the proverbial red or blue wave where one party picks up significantly more seats than expected? Current election expectations are showing that Democrats are currently favored to make gains, while a massive blue wave is not reflected in the latest polls. That said, election results can be quite different than what the polls show. So, what if there’s a massive shift in the House and Senate races to favor Democrats? A likely target for change would be the One Big Beautiful Bill Act, which may be targeted for outright changes, reinstatement of past spending reductions, and other tax-related provisions. A significant or an unexpected night outcome in congressional control can create short-term market volatility.
(13:46) Markets historically digest unexpected or surprised election outcomes through a sharp, immediate spike in short-term volatility, followed by a rapid stabilization as repricing and clarity returns. Once the political landscape becomes clearer, a divided government can provide companies and investors with greater visibility into the pace and likelihood of major policy changes, allowing markets to adjust accordingly.
(14:15) Long-term results depend more on economic fundamentals and earnings. Certain sectors, specific industries, may face targeted risk from unexpected policy changes or election outcomes. However, companies will continue to innovate, consumers continue to spend, and businesses will continue to adapt regardless of election outcomes.
(14:37) The key question regarding midterm elections is what should investors do? First, separate political headlines from investment fundamentals. Don’t confuse political convictions with investment convictions. Political conviction is a set of social or ideological values, often tied to a political party or social outcome, while investment conviction focuses more on the fundamentals and market valuations of an asset or a company.
(15:06) Allowing personal political convictions can dictate your investment strategy and cause a partisan portfolio bias, such as an emotional exit, when an investor whose political views differ when the opposing party wins rather than for fundamental reasons. Emotions can destroy returns. It can be tempting to sell out of fear and panic sell. Staying properly invested can help you participate when markets recover quickly. Emotions are one of the biggest challenges in investing, because they can turn natural psychological reactions into costly financial mistakes. There is more risk in having an emotional reaction to who wins versus your investment plan. Conversely, when the investor’s preferred party takes office, they may become overly optimistic and assume that the election results will benefit certain positions or sectors, leading them to take on excessive risk that is not in alignment with their investment plan and goals.
(16:03) Lastly, placing trades based on headlines or potential policy changes that have yet to be passed. As mentioned earlier, a proposed policy is just that, proposed. The news may make it sound as if it is law or that the policy will be passed as is, but many times, when or if it is even passed, it can be quite different to the initial proposal, which can dilute the expected impact on the economy or a specific industry.
(16:29) Avoid market timing during elections. It may be tempting to sell and sit on the sidelines during a time of uncertainty, which, as we discussed, is common during an election year. However, you must be right twice, once when you sell and once when you buy back in, which in practice does not work for the vast majority of investors who try to time the market. Missing just a few of the market’s strongest trading days can significantly reduce long-term investment returns.
(16:57) Psychologically, when investors panic sell, they often remain on the sidelines, waiting for the right time to re-enter. The best days happen during the worst times and can occur within days of its steepest drop. By the time most investors feel comfortable buying in again, the markets may have already recovered sharply. By that time, those investors would have to buy back in at a higher price than what it was sold and lock in that loss. Not to mention that if those positions that was panic sold at a gain there may be potential capital gains tax from that trade.
(17:31) Focus on what you can control. You can’t control market swings. And rather than attempting to time the market based on the political outcomes, focus on what you can control. I’m not saying that politics have no impact on the market and specific industries. What’s important is something you can control, which is having a well-diversified portfolio.
(17:52) Our discussion so far has focused on the US midterm elections and its potential impact on the US economy and the US stock market.
(17:59) It is important to understand that the US stock market accounts for approximately 60% of the total value of publicly traded stocks worldwide, with the remaining 40% spread across markets in other countries. While the US midterm elections historically impact the US stock market for a short time, it has more limited impact on other global economies and global stock markets. Having exposure to other international equities is an effective way to capture broader economic growth.
(18:27) It hedges against US specific political and market cycles and potentially improve returns and/or reduce risk with the additional diversification. Some years, the US stock market will outperform other global stock markets. Other years, stock markets around the world will outperform. For example, in 2025, the S&P 500 had a gain of 17.03%.
(18:51) In comparison, the MSCI World ex USA Index, which measures developed countries’ stock markets outside the US, had a return of 31.85%, while the MSCI Emerging Markets Index, which measures emerging stock markets, posted a gain of 33.6%. The US, as previously mentioned, accounts for 60% of total publicly traded stocks worldwide. But in 2010 and 2012, and again in 2017 to 2018, US stocks accounted for 40% to 41% of the value of publicly traded stocks.
(19:25) Another item is to review your overall investment plan and current diversification and make necessary adjustments based on your long-term strategy. Make sure your risk exposure matches your financial goals. This can be done with a professional and using tools to help measure your risk tolerance in relation to your current investment mix and help guide any necessary adjustments.
(19:49) Keep in mind that the midterms and news headlines are short-term noise. Focus on your time horizon and adjust according to your specific needs and goals, which will better serve you than making changes based on a news headline. Understand that uncertainty is not always a bad thing. It can be an opportunity. Uncertainty can create market mispricing and psychological discomfort, presenting opportunities and reward for patient investors who maintain a long-term perspective.
(20:18) Elections can create plenty of headlines and short-term market volatility, but decades of history suggests that political cycles are generally a short-term consideration. Over the long run, economic growth, corporate earnings, and innovations tend to be more important drivers of stock market performance. Maintaining discipline during periods that are volatile and uncertainty is high is never easy, particularly when dire headlines dominate the news.
(20:45) This is why having a clear investment plan and reviewing it regularly can be so valuable in helping you look beyond that noise and staying focused on your long-term objectives. Having an investment plan provides you with a financial anchor to look at the big picture and refocus on your goals. The economy and stock market will move in cycles of growth and decline, and as will companies and sectors. There will be bull markets and bear markets along the way.
(21:16) Well there’s not a way to effectively only participate in just the up markets or completely avoid down markets. What can be done to improve your chances of successfully meeting your goals is to have an investment plan, one that should be reviewed periodically with a professional and adjusted when appropriate.
(21:35) In closing, I want to take a moment to thank everyone for spending your time and joining me on this webinar, Markets and the Midterms, What Investors Need to Know. If you have any questions, please do not hesitate to reach out to us at Optima Asset Management.
