It's been a spring with headlines whipsawing the market—but keep in mind, this volatility isn't just a result of conflict in the Middle East. In fact, there's a historical norm in play.
The Midterm Rhythm: Why Market Volatility Is Part of the Plan
At Exit Wealth®, our role is to provide the historical perspective that often gets lost in the daily noise. If you are noticing this market drawdown right now, it is important to know that this is not just typical—it is historically expected.
The Midterm "Drag"
Midterm years are the most volatile of the four-year presidential cycle. Since 1950, the S&P 500 has experienced an average intra-year drawdown of roughly 17% during midterm years. This is significantly deeper than the 13% average pullback seen in non-election years.
Why does this happen? The market dislikes uncertainty, and the months leading up to a midterm election are defined by it. We see shifting policy platforms, debates over tax laws, and the looming possibility of a change in congressional control. This "fog of politics" often causes the market to trend sideways or lower through the second and third quarters. In fact, since 1931, the S&P 500 has averaged a return of only around 3% in midterm years, compared to much higher returns in the other three years of the cycle.
The Post-Election Surge
While the first three quarters of a midterm year can be a test of patience, the "silver lining" is remarkably consistent. Once the election is decided—regardless of which party wins—the uncertainty evaporates.
The data on the subsequent recovery is some of the most compelling in finance:
- The 100% Record: Since 1950, the S&P 500 has been positive 100% of the time in the 12 months following a midterm election.
- Double-Digit Gains: The average return in those following 12 months is approximately 15% to 16%, nearly double the average return of all other years.
- Year Three Strength: This momentum typically carries into the "Pre-Election Year" (Year 3), which has historically been the strongest year of the entire four-year cycle.
The Post-Election Surge
While uncomfortable when they're happening, look at market drawdowns as the kind of pain you may feel during a rigorous workout—"no pain, no gain" comes to mind. At Exit Wealth®, we view these mid-year dips not as a signal to exit, but quite the contrary, an opportunity to add to your portfolio. As others have noted, history may not repeat itself, but it sure tends to rhyme. History shows that those who stay disciplined through the pre-election volatility are often rewarded in the strong recovery that historically follows.
Our focus remains on your long-term goals, not the short-term headlines. If you have questions about how your specific allocation is positioned for the expected year-end recovery, let's talk.
All opinions expressed in this newsletter is for general informational purposes and constitutes the judgment of the author(s) as the date of the newsletter. The opinions and views expressed by the author are personal and based on economic or market conditions at the time of publication. Actual economic or market events may turn out differently than anticipated. Nothing in this material is intended to serve as personalized investment, tax, or insurance advice. These opinions are subject to change without notice and are not intended to provided specific advice or recommendations for any individual.
The material has been gathered from sources believed to be reliable, however Exit Wealth® cannot guarantee the accuracy or completeness of such information, and certain information presented here any have been condensed or summarized from its original source. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always, please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
