Recap
How Does a Split Congress Affect the Stock Market?
A split Congress historically benefits stocks because political gridlock prevents sudden tax hikes and major regulatory overhauls. This policy certainty allows companies to plan and invest. While election years see early volatility, the S&P 500 averages a 14.1% gain in the six months following a midterm election.
- Gridlock Cuts Policy Risk: Divided government blocks extreme legislation, removing the policy uncertainty that triggers market sell-offs.
- History Shows Strong Returns: Following split-Congress midterms in 2018 and 2022, the S&P 500 rallied 31.5% (2019) and 26.3% (2023).
- Pre-Election Slumps Give Way to Rallies: Midterm years average a 7.5% return before the vote, but stocks typically surge roughly a month before Election Day as outcomes clarify.
- Timing the Market Backfires: BlackRock data shows investors who moved to cash when their opposing party held power significantly underperformed those who stayed invested.
- The Fiduciary Take: Base your retirement on durable, multi-scenario income planning rather than reacting to short-term election headlines.
Frequently Asked Questions
Which political party is better for the stock market?
Neither. Non-partisan historical data shows long-term market growth tracks corporate earnings, inflation trends, and Federal Reserve policy rather than which party holds the majority.
Should I move my 401(k) to cash before an election?
No. Shifting to cash locks in paper losses and often causes investors to miss the historical 14.1% average rally that occurs in the six months post-election.
How will the 2026 midterm elections impact the stock market? As investors face a turbulent autumn, economic concerns are mounting.
Rising energy costs from Middle East tensions, elevated Treasury yields, lingering inflation questions for the Federal Reserve, and shifting artificial intelligence valuations dominate financial headlines. Yet despite this backdrop of political and economic uncertainty, the S&P 500 index remains remarkably resilient near all-time highs.
Now add the upcoming midterm elections to the mix.
Historically, the president’s party loses ground during midterms—dropping an average of roughly 27 House seats and three Senate seats across the past 23 cycles. That historical precedent opens the door to a divided government entering 2027.
Investors often mistake a divided government for an economic roadblock. In reality, business leaders and fund managers prefer gridlock over a legislative free-for-all. When neither party holds absolute control, sweeping tax overhauls and drastic regulatory swings get shelved. That policy stability allows companies to budget, hire, and invest capital without having to guess what rules Washington will rewrite next year.
Why Is Political Gridlock Good for Wall Street and Investors?
A divided Congress makes sweeping statutory overhauls—whether to corporate taxes, major regulatory frameworks, or entitlement spending—far more difficult to push through. Washington certainly becomes less productive, but from an investment perspective, that absence of dramatic legislative change removes one of the market’s biggest enemies: uncertainty.
From the Experts
“When clients sit across from me in Kalamazoo or Battle Creek worried about who takes Congress, I remind them of one fundamental truth: markets don’t vote red or blue—they vote for certainty,” says Chuck Henrich, President of Southwest Michigan Financial. “A divided government acts like a governor on an engine. It slows down radical legislative shifts, and that predictability gives businesses the confidence to invest, hire, and grow.” — Chuck Henrich, CEO and Financial Advisor, Southwest Michigan Financial, LLC
Historical S&P 500 Performance Under Divided Government
We have watched this exact dynamic play out multiple times over the last decade:
- The 2018 Midterms: Democrats regained the House while Republicans held the Senate, splitting government under President Trump. While 2018 closed down 4.4%, the S&P 500 rebounded powerfully with a 31.5% total return in 2019 and another 18.4% gain in 2020.
- The 2022 Midterms: Republicans reclaimed the House while Democrats retained the Senate. The S&P 500 dropped 18.1% during 2022—a year dominated by inflation and aggressive Fed tightening—before surging 26.3% in 2023 and adding another 25.0% in 2024.
A split Congress didn’t drive those rallies all by itself, but history makes this clear: Washington gridlock has never stopped the stock market from heading higher in the long run.
Do Stocks Go Up After Midterm Elections?
Midterm election years do tend to feel bumpy while you are living through them. On average, midterm years have generated a 7.5% annual return compared to 12.4% across all historical calendar years.
However, the bulk of that drag happens before voters head to the ballot box. Since 1970, broad markets have typically begun staging rallies about a month before the midterms as the electoral smoke begins to clear.
Even more compelling: the average market return during the six months following a midterm election stands at roughly 14.1%.
Markets do not care about partisan outcomes nearly as much as they care about knowing the ground rules. Once the election passes, capital comes off the sidelines.
Does Pulling Money Out of Stocks During Elections Hurt Returns?
Consider a real-world scenario that mirrors what we frequently see in our practice.
In late 2018, “Dave and Susan,” a couple from Portage in their early 60s, became deeply alarmed by the prospect of a divided Congress and daily volatility. Convinced that gridlock would stall corporate growth, Dave liquidated a significant portion of their equity portfolio to cash equivalents in December 2018, intending to “wait out the political storm.”
Because they moved to the sidelines:
- They completely missed the 31.5% market recovery in 2019.
- Hesitant to buy back in at higher valuations, they remained underinvested through 2020.
- By the time they re-entered the market, their delay had permanently sacrificed tens of thousands of dollars in compound growth—capital meant to support their upcoming retirement distributions.
Their experience highlights research conducted by BlackRock: investors who shifted to cash whenever their preferred political party was out of power dramatically trailed those who stayed disciplined and remained invested across full market cycles.
How Do I Build a Plan for Any Administration?
Today’s headlines—energy costs, bond market swings, inflation data, and technological shifts—are genuine considerations that deserve careful risk management. But history proves that reacting emotionally to political shifts is among the fastest ways to derail a retirement plan.
A split Congress may produce political theater and a sleepy lame-duck period, but for your nest egg, a divided government is far from a disaster.
The sound fiduciary approach isn’t guessing election outcomes—it is building a custom, tax-efficient retirement income strategy engineered to weather volatility no matter who sits in the White House or holds the speaker’s gavel.
Ready to Protect Your Retirement from Political and Market Headwinds?
Volatile market cycles and political shifts can make long-term financial decisions feel overwhelming. You do not have to navigate shifting economic rules on your own. At Southwest Michigan Financial, our fiduciary team works directly with you to build a resilient, multi-scenario distribution plan tailored to your lifestyle and goals.
Call our office directly at (269) 323-7964 to speak with our team, or take advantage of our live educational resources and scheduling tools:
- Schedule a One-on-One Conversation: Book a complimentary 15-minute consultation via the Ask Chuck Call Booking to review your portfolio strategy.
- Map Out Your Cash Flow: Download the Retirement Income Resource Guide to learn how to sequence distributions and reduce tax exposure in retirement.
- Protect Family Assets: Explore our Wealth Transfer Guide to coordinate your estate and legacy goals.
- Navigate Health Coverage: Visit our Medicare Resource Page to avoid late-enrollment penalties and safeguard your healthcare budget.
- Accelerate Mid-Career Growth: Access the Under 50 Advantage Guide for actionable compound-growth strategies.
FAQ
Which Political Party Is Better for the Stock Market?
Answer: Non-partisan data shows market trajectory correlates more with macroeconomic cycles and corporate earnings than congressional party control.
Should I Move My 401(k) to Cash Before an Election?
Answer: No, moving to cash risks missing pre- and post-election rallies.
Sources
- MarketWatch: Historical analysis of midterm election cycles, congressional party seat changes, and post-election market volatility metrics.
- BlackRock Investment Institute: Longitudinal study on investor behavior during presidential/midterm election cycles and historical S&P 500 performance under divided vs. unified government.
This blog is created and authored by Chuck Henrich (Content Creator) and is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creators own opinions and it should not be regarded as a description of services provided by Southwest Michigan Financial, LLC. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this Blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. The Content Creator and Southwest Michigan Financial, LLC assumes no responsibility or liability for any consequences resulting directly or indirectly for any action or inaction you take based on or made in reliance of the information, services or materials provided within this blog.
