How Should Mid-Term Elections Affect My Investment Strategy?
With Election Day on November 3rd, the questions tend to pile up: Will the results move my portfolio? Should I wait until after the vote to invest? Would it be smarter to sit in cash for a few weeks? If you've asked yourself any of these, you're in good company, and the urge to do something is completely understandable.
But, for most long-term investors, the midterm elections shouldn't change an investment strategy. Elections create real uncertainty, but markets have worked through every election cycle, and a well-built plan already assumes surprises. A better question than "who wins?" is "does my plan still match my goals?"
Why do midterm elections make investors so nervous?
Uncertainty is the main reason. Questions about taxes, regulation, and spending priorities tend to grow ahead of midterm elections. And, history gives those nerves some basis: midterm years have often brought more volatility and weaker returns than other years.
One long-running study covering 31 midterm elections since 1900 found that the S&P 500 returned an average of 2.9% in the 12 months before those elections, compared with an 8.9% average across all years in the study (Source: U.S. Bank). So, if the months leading up to an election feel bumpy, that isn't your imagination - but it’s also only half the story.
What does history say about markets after a midterm election?
The pattern has tended to flip once the votes are counted, regardless of who is elected. Historically, uncertainty has faded quickly after the results are in, and the 12 months following midterm elections have generally produced some of the strongest results in the entire four-year cycle.
Two data points illustrate this:
- Since 1938, the S&P 500 has posted price gains in the 12 months following a midterm election 95% of the time. (Source: Fidelity)
Across that same long study of elections since 1900, the average 12-month return after midterms was 12.4%. (Source: U.S. Bank)
It would be easy to read those numbers as a reason to trade around the election. At Entrust Wealth Partners, we'd encourage you not to for three key reasons:
- Averages hide a wide range: Stocks have usually risen in the 12 months after an election, but not always.
- Correlation isn't causation; Research from U.S. Bank found that the economy, not elections, does most of the work in driving market returns. The same research found no statistically significant difference in average returns between periods of one-party and mixed control of government.
- The past doesn't promise the future: Average patterns can differ from what actually unfolds, because economic, geopolitical, and technical forces are always changing.
Here's the more useful takeaway:
Markets have historically recovered from election-year uncertainty, and much of that recovery happened right after the uncertainty cleared. An investor waiting on the sidelines for things to feel "clear" has often found that the market moved first.
Why is it so hard to predict how an election will affect my portfolio?
Because to profit from an election, you'd have to be right about three separate things:
- Who wins: Polls and forecasts are not certainties.
- What actually becomes policy: Campaign proposals often change on the way to becoming law, or never become law at all.
- How markets react: Markets look forward, so much of what people expect is already reflected in prices. The reaction can end up being the opposite of what seems intuitive.
Missing any one of those steps can turn a confident move into a costly one.
What does it really cost to change my portfolio because of politics?
Something that is often overlooked is the cost of changing your investment strategy due to politics -which can be significant. These include:
- Taxes: Selling investments in a taxable account can trigger capital gains tax right away.
- Having to be right twice: Getting out is only half the decision - you also have to decide when to get back in.
- Missing the rebound: If markets recover quickly once uncertainty clears, as they have historically, being out of the market during that window can be expensive.
Decisions that lead to more decisions: One reactive move often creates several more, and most of them have no clear answer and get made under stress.
Here’s an illustrative example: Imagine an investor who moves $500,000 to cash in October to "wait for clarity." If $150,000 of that was gains in a taxable account, a 15% federal capital gains rate would mean roughly $22,500 in tax before a single dollar gets reinvested. Then comes the harder question: when does it feel safe enough to go back in? Your actual tax rates and results would differ, but the dilemma is real.
What should I focus on instead?
The things that actually determine whether your plan succeeds are the ones that don't change with the news cycle:
- Your time horizon: When will you need this money, and for what?
- Your cash flow needs: Having the near-term spending you need covered means you're never forced to sell investments at a bad time.
- Your risk tolerance: Is your portfolio built so that you can stick with it when markets get rough?
- Diversification and rebalancing: These are routine maintenance, not reactions.
- Tax planning: Strategies like gain management, Roth conversions, and charitable giving work on their own calendar, not the election's.
Regular reviews: At Entrust Wealth Partners, we review plans on a set schedule, so decisions are made calmly and on purpose, not under pressure from a news alert.
When should a change in the world lead to a change in my plan?
To be clear, we aren’t making the case for never changing anything. Plans should evolve, in response to your life, not the headlines. Real reasons to revisit your plan include:
- Approaching or entering retirement
- Selling a business or receiving a large liquidity event
- Receiving an inheritance
- A change in health or family circumstances
A shift in your goals or your honest comfort with risk
If any of these have happened, that's a conversation worth having.
How do I stay calm when the news gets loud?
A few simple habits help:
- Set boundaries with the news: You can stay informed without watching it all day.
- Write down your plan and why you built it that way: It's a useful reminder when emotions run high.
- Pause before acting: If you feel the pull to make a change, wait a day and talk it through with us first.
Reconnect with what the money is for: Your plan exists to support your family, your goals, and the life you want to live.
A Life Well Balanced
Staying informed is natural, and paying attention to the news is part of caring about your future. A plan built for the long term simply means the headlines don’t have to be what decides your next move, so you have more room to spend November with the people you love. That’s what we’re here for.
If your goals or circumstances have changed, or you’d like a second set of eyes on your plan, we’re always glad to talk it through. Reach out to Entrust at (860) 838-3730 with any questions.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This material was prepared by Growth Minded Strategy.
