With the U.S. midterm elections just four months away, investors are bracing for heightened market volatility as Democrats and Republicans battle for control of Congress. While election uncertainty often rattles markets, historical data suggests it has also created compelling entry points for long-term ETF investors.
According to LPL Financial, the market’s performance has followed a remarkably consistent pattern across presidential cycles, with weakness during midterm years frequently giving way to a strong rebound once election uncertainty fades.
Midterm Years Have Historically Been The Weakest for Stocks
Since 1954, the S&P 500 has posted an average annual return of just 4.6% during midterm years, the lowest among the four years of the presidential cycle, LPL Financial charts show.
Those years have also recorded the largest average maximum drawdown of 17.5% and the highest realized volatility at 15.6%, highlighting the increased market turbulence that typically accompanies congressional elections.
History Points to a Strong Post-Midterm Rebound
Despite the near-term volatility, markets have historically staged powerful recoveries once the elections conclude.
LPL data shows the S&P 500 has delivered positive returns in all 18 post-midterm periods since 1954, generating an average gain of 18.2% over the following 12 months.
According to the firm, the pattern reflects declining policy uncertainty after election results become known, allowing investors to shift their focus back to corporate earnings, economic growth and Federal Reserve policy.
What it Means for ETFs
The historical pattern is particularly relevant for investors in ETFs tracking the S&P 500.
The SPDR S&P 500 ETF Trust (NYSE:SPY), the world’s oldest ETF with roughly $788 billion in assets under management, remains the benchmark vehicle for investors looking to gain broad exposure to the U.S. equity market. Its peers, the Vanguard S&P 500 ETF (NYSE:VOO) and the iShares Core S&P 500 ETF (NYSE:IVV), have also attracted hundreds of billions of dollars as low-cost core portfolio holdings. In fact, due to its cost efficiency and brand value, VOO is currently the world’s largest ETF with an AUM of $1.7 trillion.
Because all three funds replicate the S&P 500, they stand to benefit directly if the index follows its historical post-midterm pattern. Rather than betting on which sectors or industries could benefit from election results, these ETFs offer diversified exposure across 500 of the largest U.S. companies, allowing investors to participate in a broad-based market recovery.
The setup could also reinforce the appeal of dollar-cost averaging. Investors who continue adding to broad-market ETFs during periods of election-driven volatility can benefit when uncertainty fades and equities regain momentum.
Politics May Matter Less Than Market History
LPL’s base case is a split Congress, a scenario that could reduce the likelihood of sweeping legislative changes while increasing political negotiations over issues such as government funding and the debt ceiling.
For ETF investors, however, the bigger takeaway may be that market performance has historically depended less on which party controls Congress and more on the return of policy certainty. If the past seven decades are any guide, periods of heightened election uncertainty have often proved to be opportunities for long-term investors in broad-market S&P 500 ETFs rather than reasons to exit the market.
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