75 Days to U.S. Midterms: Stocks Tend to Ease Up Around "50 Days Out" [Weekend Money]

Midterm Years See Weakest Stock Performance in Four-Year Cycle
Volatility Eases Around 50 Days Out, Recovery Pattern Continues Through Year-End

The U.S. midterm elections, scheduled for November 3, are now just over two months away. All 435 seats in the House of Representatives and 35 seats in the Senate are at stake. Meanwhile, the U.S. stock market is currently passing through the weakest phase of the four-year political cycle. Dividing time into four-year cycles since 1945, the average annual return on the S&P 500 in midterm election years is just 0.6%, below that of presidential election years (1.6%), the year after a presidential election (2.0%), and the year after midterms (3.6%). Conversely, volatility has tended to reach its highest levels during midterm years.

Seungmin Yoo, a researcher at Samsung Securities, interpreted this sluggish performance as a "discount for uncertainty" in a recent report. In other words, with election outcomes unknown, investors are inclined to buy stocks at a discount, which suppresses prices. Yoo noted, "Historically, volatility in risk assets tends to ease about 50 days before the U.S. midterms."

Midterm Election Years Perform Poorly... Uncertainty Itself Is a Cost

U.S. President Donald Trump. Photo by Reuters

Narrowing the time frame reveals a clearer pattern. Overlaying the results of 20 midterm elections since 1946, the S&P 500 remained in negative territory throughout the six months leading up to the elections but began to rise after election day. The rally typically continued through the end of the year. The Nasdaq followed a similar trajectory.

Looking at the Volatility Index (VIX)—an indicator extracted from options prices to assess the risk of sharp price drops—levels are higher than average 100 to 75 days before the election, then begin to decline from 50 days out. The risk premium that the market has built in due to uncertainty about the outcome dissipates as election day approaches. This is also when the predictions of polls and betting markets start to converge and investors factor the expected outcomes into their strategies.

Currently, Republicans hold a majority in the House with 218 seats, while Democrats have 213 seats. In the Senate, the Republicans hold 53 seats to the Democrats' 47, and among the 35 Senate seats up for election, 22 are currently held by Republicans.

Voters’ concerns are heavily focused on inflation and the economy. According to a recent Financial Times survey, 53% of registered voters said their finances had worsened since Trump took office. U.S. President Donald Trump’s approval rating stands at 38–40% in major polls. Particularly, the fact that support among independents has dropped below 40% is often taken as a signal for a 'wave election,' where one party sweeps a large number of seats.

The calculations made in betting markets show a slightly different picture. On Polymarket, the probability of Democrats taking control of the House is about 87%, while the odds in the Senate stand at 52%—almost a coin toss. To flip the majority in the Senate, Democrats need to gain four more seats, which would require protecting Georgia and Michigan while also winning in key battlegrounds like North Carolina and Maine.

Samsung Securities, combining various betting odds, outlined the following scenarios: Democrats win both chambers (45.2%), split legislature (Republican Senate + Democratic House) (43.5%), and Republicans win both chambers (6.0%). With Republicans facing an uphill battle to maintain control of both chambers, the Senate outcome appears to be the major pivot point.

Divided Government Favors the Bond Market... but the Debt Ceiling Awaits Next Year

The bond market moves in a similar fashion to equities. Before the elections, interest rates often fluctuate due to an uncertainty premium, but tend to fall as election day nears. However, bonds react more sensitively to election results. When unified government—where one party controls both chambers—breaks and divided government emerges, with each party controlling one chamber, the post-election decline in interest rates has historically lasted longer.

This is because it becomes more difficult to pass major legislation when Congress is split. If the government cannot push forward with large-scale stimulus measures that require significant spending, there is less need to issue new Treasury bonds. For bond investors, the reduced supply pressure provides more room for rates to decline. Since 1960, there have been five midterm elections that resulted in a divided government: 1994, 2006, 2010, 2018, and 2022. All of these have occurred in recent decades.

However, it is difficult to apply this pattern as-is this time around. Yoo noted, "Regardless of whether Republicans or Democrats are in power, recent administrations have shown a trend toward increasing fiscal deficits." He added, "Even if Democrats take control of the House in these midterms, the need to raise the debt ceiling next year means that concerns over fiscal deficits are likely to persist." Because the government still faces the task of raising the borrowing limit, there may be limits to long-term declines in Treasury yields.

The dollar’s direction is even harder to predict. While the dollar index has tended to weaken in midterm years, results have varied significantly by currency. However, if Republicans lose the House, a strengthened legislative check could hinder President Trump’s tariff policy, possibly weakening the dollar as a result.

Another variable is President Trump himself. Yoo pointed out, "If Trump suffers a defeat in the midterms, unpredictability could increase," but also noted, "During the remaining campaign period, President Trump is expected to intensify efforts to shift public sentiment on economic issues."

This content was produced with the assistance of AI translation services.