One of my favorite stock market phenomena happens every four years, and it’s scheduled once again for this fall: midterm elections and the gridlock – sweet gridlock – that can spark a nice bull run afterwards.
Yes, the congressional midterms routinely create an increasingly gridlocked legislature that accomplishes relatively little. This may not be welcome for whoever’s running Washington, but historically, it has proven to spark the most consistently positive nine-month cycle for US and foreign stocks.
It all starts in October, so don’t let all of the noise over inflation, oil and war distract you from missing out on this party.
My bullish 2026 forecast noted how big, controversial legislation always happens during the first two years of a given White House term. Presidents know they’ll lose some of their power after the midterms, so they push their biggest, most “important” bills early on. Always.
Stocks often waver then. Big legislation creates winners and losers, spiking political uncertainty and risk aversion. Presidents’ first two years have each been positive only about 60% of the time throughout history – not bad, but below average.
Presidents’ second years bring midterm campaigns. Shrill, extremist rhetoric grabs headlines as candidates play to their bases to win primaries – spooking stocks. This partly explains why the S&P 500 is historically positive in only 46%, 58% and 60% of midterm years’ Q1s, Q2s and Q3s, respectively (through this June).
Then it comes. Since 1914, when the 17th Amendment mandated direct Senate elections, the president’s party shed House seats in 89% of midterms, averaging 30 lost – and 71% of Senate midterms, averaging 4 seats lost. It only takes one chamber down in this double-barreled blast to increase gridlock.
Accurate stock data start with 1925. Since then, the S&P 500 gained in 84% of midterm year Q4s and 92% of the nine-months stretches that began with those quarters – together averaging a whopping 19.8% gain!
The trend strengthens as the president transitions into a lame duck, and because of high global stock market correlations it ripples overseas. In the 10 nine-month episodes since accurate foreign data exist, it has never overall lost money overseas.
Party doesn’t matter. Nor does stocks’ performance earlier that year. It works because we simply won’t believe it works. Blinded by ideology, we all always expect bloody disaster and all hell to break loose if our side loses. That includes investors, both domestic and foreign.
But subsequent legislative quiet brings positive surprise for stocks, just as I detailed here in November 2022. From Q4 2022’s start through Q2 2023’s end, the S&P 500 leapt 26% despite weak markets entering October.
Now? Nearly everyone hypes extremes, like the Democratic Socialists’ “rise.” Or President Trump floating buying votes with $5,000 checks – or just being Trump. Ignore all of the outrage and kvetching from every side. See it like stocks do: Gridlock is good.
Republicans hold slim majorities in both chambers. You know gerrymandering by both parties created few House races being truly flippable. Maybe about 25 are truly in doubt, which will decide the near-equally split chamber. Only seven Senate seats are true tossups with Republicans having a three-seat edge.
The thing is, the “miracle” happens even if neither chamber flips. Imagine losing one House seat and two Senate seats. It would still increase relative gridlock, leaving the Republicans in technical “control” of both chambers while nothing controversial could pass to the president’s desk. Legislative calm. In a president’s final term, like now, the effect grows as a few more Republicans lose fealty post-November as they start to contemplate a post-Trump reality.
Yes, roaring rhetoric will reach fever pitch in the coming weeks as campaigns come to a head, but don’t get rattled. Stocks soon will start pre-pricing a long, comfortable dip in political risk. As the legislative quiet takes hold, get ready for the sweet, stock-goosing goodness of gridlock.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.