As the U.S. midterm election voting day approaches, Wall Street has begun systematically reviewing the historical impact of election cycles on stock markets. A newly released research report from UBS shows that since 1950, the S&P 500 has tended to exhibit a “dip first, rally later” pattern in midterm election years: volatility amplifies significantly in September and October, followed by sustained gains in the months after the election, with the rally potentially extending into the following spring.
The report’s data shows that across all midterm election years since 1950, the S&P 500 delivered an average return of 14.5% from late August through late March of the following year, with a median return of 16.4%. UBS strategists note that this window typically starts off rocky — the index’s median return from late August to early October is a decline of 1.4%, after which it gradually recovers through year-end.
Breaking down the time window further, in midterm election years, the S&P 500 averages roughly a 6% gain from September to year-end, compared with approximately 4% during the same period in non-midterm years. The rally then broadens into the first quarter of the following year, with average cumulative gains reaching roughly 14% by March. Across the entire historical sample, only three midterm election cycles — 1978, 2002, and 2018 — produced negative returns.
September-October Volatility Intensifies; Implied Volatility Eases Post-Election
The report also emphasizes that market volatility rises notably around midterm elections. Historical data shows that September and October are already the two most volatile months of the year for the S&P 500, and this characteristic is particularly pronounced in midterm election years.
Once election results are settled, market uncertainty dissipates and implied volatility typically retreats. The historical trajectory of the VIX confirms this pattern: the index has consistently climbed from late Q3 into Q4 before turning lower. For investors, this means the pre-election choppy period tends to come with elevated hedging costs, while the post-election decline in volatility provides a calmer environment for risk assets.
Incumbent Party Loses Average of 25 House Seats
Beyond market performance, UBS also compiled the political patterns of midterm elections. Historical data shows that after midterm elections, the president’s party loses an average of 25 seats in the House of Representatives and 3 seats in the Senate. In 19 midterm elections since 1950, there have been 8 instances where the sitting president’s party lost control of one or even both chambers of Congress.
Current betting market implied pricing shows the Democratic Party with an over 85% implied probability of winning the House, while the battle for Senate control is nearly a coin flip. This suggests that the power structure across both chambers of Congress remains subject to considerable uncertainty following this midterm election.
UBS notes in its report that election outcomes could affect the policy outlook for U.S. taxation, regulation, and other areas relevant to equity markets. However, the bank also stresses that the near-term trajectory of stocks over the next 6-12 months will likely depend more on government policy direction and corporate earnings growth than on the election event itself.
For investors focused on the outlook for U.S. equities, this historical review offers a valuable reference framework: elevated volatility in September and October of midterm election years is the norm rather than the exception, while the rally window from post-election through the following spring has materialized in the majority of historical samples.
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