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U.S. stocks have historically delivered strong gains following midterm elections, although investors often face increased market volatility in September and October before equities strengthen toward year-end, according to UBS research published Sept. 11.
Since 1950, the S&P 500 has gained an average of 14.5% from the end of August in midterm election years through the following March, with a median return of 16.4%, UBS strategists said. However, stocks have typically experienced choppy conditions first, including a median 1.4% decline between late August and early October.
From September through year-end, the S&P 500 has historically returned about 6% during midterm years, compared with roughly 4% in other years. Average gains have reached approximately 14% through the following March. Only three midterm periods in UBS's historical sample produced negative returns: 1978, 2002 and 2018.
Election outcomes could also shape U.S. market expectations. UBS noted that the president's party has historically lost an average of 25 House seats and three Senate seats during midterms. The incumbent president's party lost control of at least one congressional chamber in eight of the 19 midterm elections since 1950.
At the time of UBS's report, betting markets implied a greater than 85% probability of Democrats taking control of the House, while expectations for Senate control were roughly evenly divided. The firm said congressional control could influence tax and regulatory policy, though stock performance over the next six to 12 months may depend more heavily on administration policies and corporate earnings growth.
UBS also highlighted increased S&P 500 volatility around midterm elections. September and October have historically been particularly volatile, while implied volatility has generally declined after Election Day. The VIX has similarly tended to rise during the late third and fourth quarters before retreating.
UBS said midterm-related volatility risk premiums had already declined by about half following a recent seasonal increase. The firm cautioned that historical performance does not guarantee future S&P 500 returns.
