With Election Day on November 3, investors are once again asking a familiar question: What will the midterm elections mean for the stock market?
It is an understandable question. Elections can influence tax policy, regulation, government spending, trade policy and the broader economic environment. With all 435 seats in the House and 35 Senate seats being contested this year, the outcome could affect the legislative environment for the next two years.
But there is an important distinction between political uncertainty and investment uncertainty.
Markets have historically reacted to midterm elections, but the election itself is only one of many factors driving investment returns. Interest rates, inflation, economic growth, corporate earnings, valuations and geopolitical developments can ultimately have a much greater influence on portfolios.
That distinction matters because the most useful question for investors may not be, “Who will win?” It may be:
“Is my financial plan strong enough that I don't need to know?”
What History Tells Us About Midterm Elections and Markets
There is a recurring pattern around midterm elections: markets can become more volatile as Election Day approaches, as investors attempt to assess potential changes in government policy.
Historically, the months following midterm elections have often been stronger for stocks. BlackRock's analysis of midterm cycles since 1970 found that the S&P 500 produced an average return of approximately 14% during the six months following midterm elections.
That statistic is interesting, but it should not be interpreted as a forecast for 2027. History provides context, not certainty.
The market's response to an election depends heavily on what investors have already anticipated. If an outcome is widely expected, it may have relatively little impact when the votes are counted. Conversely, an unexpected result can cause markets to reprice quickly.
We would argue that trade policy, geopolitics and regulation may ultimately have more influence on markets than the election result alone.
In other words, the election is important, but it is not the entire investment story.
What May Matter More Than the Election
As we look beyond November, several factors deserve investors' attention.
Interest Rates
Interest rates remain one of the most important variables for both stocks and bonds.
In September, the Federal Reserve raised its target federal funds rate to 3.75%–4.00%, with inflation remaining an important concern. Federal Reserve officials have indicated that the future path of rates will depend heavily on incoming economic data.
For investors, the important question is not simply whether rates rise or fall. It is what happens to the relationship between inflation, economic growth and interest rates.
Higher rates can place pressure on valuations and borrowing costs, but they can also make high-quality fixed income more attractive than it has been in years.
Inflation
Inflation remains another critical variable.
Tariffs, energy prices, wage growth and consumer demand can all influence inflation. If inflation remains persistent, the Federal Reserve may have less flexibility to reduce interest rates.
That matters for retirement planning because prolonged inflation can affect not only investment returns, but also the amount a household needs to spend each year to maintain its lifestyle.
Corporate Earnings
Ultimately, stocks represent ownership in businesses.
Political headlines can move markets in the short term, but over longer periods, corporate earnings and cash flows are fundamental drivers of equity values.
That is particularly important after a strong market period. Investors should periodically ask whether their portfolio still reflects their original assumptions about valuations, growth and risk—or whether market appreciation has quietly changed the portfolio's risk profile.
Taxes and Government Policy
The election could also influence the future direction of tax policy and regulation.
Depending on the makeup of Congress, some proposals may become easier or more difficult to advance. At the same time, executive and regulatory actions can influence areas ranging from trade and energy to financial services and retirement policy.
For financial planning purposes, this creates an important distinction:
You don't necessarily need to predict future tax law. You need to understand how your plan would respond if tax law changes.
So, Should You Change Your Portfolio Because of the Midterms?
For most long-term investors, an election by itself is unlikely to justify a dramatic change in investment strategy.
That does not mean investors should ignore the election. It means they should put it in the proper context.
Moving a substantial portion of a portfolio to cash because of political uncertainty can create a second problem: what happens when you decide it is safe to get back in?
Historically, investors who have moved in and out of markets based on which political party is in power have often sacrificed long-term returns. We believe a better approach is generally to build a portfolio that anticipates uncertainty rather than attempting to eliminate it.
What the Midterms Should Mean for Your Financial Plan
While the election may not require a wholesale change to your investment strategy, it can be a useful reminder to revisit several areas of your financial plan.
1. Review Your Asset Allocation
Strong market performance can cause a portfolio to drift away from its intended allocation.
If equities have appreciated significantly, an investor who originally intended to maintain a 60/40 portfolio may now have considerably more equity exposure than planned.
Rebalancing is not a prediction about the election or the market. It is simply a way of returning the portfolio to the level of risk originally deemed appropriate.
2. Revisit Your Cash Needs
Investors approaching retirement should pay particular attention to liquidity.
If you expect to need significant amounts of money from your portfolio over the next several years, having an appropriate reserve of cash and high-quality fixed income can reduce the likelihood that you will need to sell equities during an unfavorable market environment.
3. Reevaluate Tax Opportunities
Market volatility and changes in tax policy can create planning opportunities.
Depending on an individual's circumstances, year-end may be an appropriate time to evaluate capital gains and losses, charitable giving, Roth conversions, retirement contributions and other tax-planning strategies.
The right decision will vary by household, which is why tax planning should be integrated with the broader financial plan rather than handled as an isolated year-end exercise.
4. Stress-Test Your Retirement Plan
Perhaps the most important question is not what the market will do next year, but whether your plan can withstand a range of outcomes.
- What happens if the portfolio falls 15% shortly after retirement?
- What if inflation remains elevated?
- What if interest rates stay higher for longer?
- What if tax rates change?
- What if one spouse dies earlier than expected?
- A strong financial plan should address these possibilities before they happen.
Don't Let an Election Become an Investment Strategy
Every election creates compelling headlines. Markets will react to polling changes, campaign announcements and policy proposals. Investors will hear arguments that one outcome will be good for stocks and another will be bad.
But the relationship between politics and markets is rarely that simple.
Economic growth, inflation, interest rates, earnings, valuations and investor expectations all interact in ways that are difficult to predict. Even professional investors can disagree about which factors will ultimately dominate.
That is why the goal of financial planning should not be to correctly predict every election, interest-rate move or market correction.
The goal is to build a financial life that can withstand uncertainty.
During these Midterm elections, investors may understandably spend time thinking about what the election could mean for the economy and markets.
A more productive exercise may be to spend some of that time thinking about what the election should mean for their own financial plan.
- Is the portfolio appropriately diversified?
- Is the risk level still appropriate?
- Are cash reserves sufficient?
- Are there tax opportunities worth considering before year-end?
- Is the retirement income plan resilient?
- Does the estate plan still reflect current circumstances?
Those questions don't depend on who wins or loses an election.
And that may be the most important lesson of all: you don't need to predict the next political environment to build a financial plan designed to navigate it.
Taylor Thomas, CFP®, AEP®
Director of Financial Planning & Wealth Advisor
NCM Capital Management LLC
180 E Main Street
Ramsey, NJ 07446
Direct - 201-739-8708
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.
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