The day after Democrats won control of both the House and Senate in the midterms, the Dow jumped 3% in its best post-midterm day since 1982. A day later, stocks plummeted and semiconductors fell more than 12%, their worst day since the COVID-19 crash.
This pattern repeats itself around elections. In 2020, stocks posted their worst week since March that year the week before the election, then their best election week since 1932. In the 2022 midterms, stocks rose before the vote, fell after, then rallied hard to end the week. The week after the 2024 election saw a historically strong surge.
Yet the data does not support selling around elections. Stocks rose at least 15% in the year after each of the last three elections. Since 1928, stocks have risen in the year after elections nearly 75% of the time. A $100 investment in the S&P 500 from the end of World War II through 2024 grew to about $37,000. If that same $100 had been invested only when a Republican held the presidency, it grew to merely $1,000. If invested only under Democratic leadership, it rose to just $4,000.
Investors often sell during elections due to loss aversion. According to prospect theory by Daniel Kahneman and Amos Tversky, losses weigh on people roughly twice as much as equivalent gains. Election weeks trigger behavioral mistakes like recency bias, which leads people to project the latest market move far into the future. When stocks dropped on November 5, trading volume hit 26.9 billion shares, well above the 20-day average of 17.7 billion, and decliners outnumbered advancers by more than 6 to 1.
Campaign promises frequently do not become policy or emerge in diluted form. The third year of a presidential term tends to be the strongest. Since 1931, third-year returns have averaged nearly 14%, versus just over 6% in the other three years. The article advises investors to stay invested, judge policies by their effect on earnings and the economy, and resist acting on fear of political change.