A New Congress Takes Office in January. Here's What It Means for Your Investing Strategy.

The midterm elections are over (at least, most of them). And an anticipated blue wave turned into a blue tsunami. Democrats picked up commanding majorities in both the U.S. House of Representatives and the U.S. Senate.

Every two years, some investors look to Washington, D.C. to decide how to recalibrate their portfolios based on who is in power. What does a new Democratic-controlled Congress in January mean for your investing strategy?

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What history shows

If history is any guide, investors could be in for some good news. Since 1950, the S&P 500 (SNPINDEX: ^GSPC) has been higher 12 months following a midterm election 100% of the time. That's right: in 19 midterm elections over the past 76 years, the S&P 500 has delivered positive returns in the subsequent 12 months.

Even better, the index's gains have usually been substantial. The S&P 500's average gain over the 12 months following midterm elections has been roughly 15%. What's behind this impressive track record? Three factors especially stand out.

First, the buildup to midterm elections creates uncertainty. Investors don't like uncertainty. When the elections are over, many breathe a sigh of relief -- regardless of which party won.

Second, the stock market has historically performed well under divided governments, in which one major political party holds the White House and the other controls Congress. Compromises and consensus must be reached for any new laws to be enacted. The risk of any sweeping legislation passing Congress and being signed by the president that disrupts growth for major companies is relatively low.

Third, the political conversation almost immediately shifts to the next U.S. presidential election after a midterm election. The party in the White House usually focuses on supporting the economy in hopes of holding onto the presidency in the next election. It's no accident that the third year of a presidential term is historically the best for the stock market.

Don't let politics drive your portfolio.

Should you drastically restructure your portfolio after a midterm election? No, especially when the elections result in divided government.

As a case in point, look at what happened following the 2018 midterms during the first Trump administration. Democrats won a majority in the U.S. House of Representatives, while the GOP retained control of the Senate. The S&P 500 soared around 29% in 2019.

It was a similar story when Republicans regained control of both chambers of Congress in the 1994 midterm elections, with Bill Clinton serving in his first presidential term. The S&P 500 skyrocketed 34% the next year.

To be sure, the incoming Democratic majority in Congress will have very different policy priorities than the GOP. Democrats could even find a willing partner in President Trump on some issues. For example, the president stated that he "could absolutely work with Democrats" on areas including trade. However, you can probably count on more gridlock than cooperation.

A straightforward strategy for 2027

Different investors will have different approaches following the 2026 midterm elections. One straightforward strategy, though, should apply to nearly everyone.

Step one is to stay invested and avoid knee-jerk moves with your portfolio. There are appropriate times to sell stocks, but the recent election results aren't among them. Remember that the market has already largely priced in any impact a divided government could have.

Step two is to maintain diversification across multiple sectors. This is something investors should do regardless of which party or parties are in power in Washington, D.C. As Nobel Prize-winning economist Harry Markowitz is attributed as saying, "Diversification is the only free lunch in investing."

Step three is to focus on the long term. Even if a midterm election resulted in legislation that created turbulence for stocks, any headwinds should be only temporary.

Ignore the political chatter. Be patient. History is on your side.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.