This Is How the Stock Market Typically Performs After Midterm Elections

The midterm elections are over. But as far as the stock market goes, Tuesday's voting results probably don't matter much, aside from some elevated market volatility.

But there's some good news about the midterms, and it has nothing to do with which party came out on top. Historically, the six-month period following midterm elections -- from November of the midterm election year to the following April -- is the best in the four-year presidential cycle for the S&P 500 (SNPINDEX: ^GSPC). That's according to the Stock Trader's Almanac, which tracks market returns closely.

And that means this is a good time for the stock market.

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There is a pattern in the stock market surrounding presidential terms

The Four-Year Presidential Election Cycle Theory holds that the stock market has a relatively predictable pattern surrounding presidential terms. In the first two years of office, the new president focuses on top priorities, such as healthcare and education, and the market's performance is below average.

In the third year -- or, really, beginning late in the second year, around the time of midterm elections -- presidents often focus on stimulating the economy. As a result, the market tends to outperform that year. Then, in the fourth year, election anxiety returns, and market gains fall again.

Here are the numbers over the period from 1950 to 2023: In year one of the cycle, the S&P 500 index gains 7.9% on average; in year two, that falls to 4.6%. Year three, the best year of the cycle, sees a 17.2% average gain. And in year four, the next presidential election year, the market returns about 7.3%. For comparison, the average annual return for the S&P 500 has been about 10% since 1957.

These are averages, of course, but the general pattern has held up well over time. And the six months following midterms are a particularly good time for stocks.

Depending on the outcome of this week's midterms, some investors might be tempted to overhaul their portfolios or even move to the safety of bonds or other less risky asset classes. But they should resist the temptation. An old investing pro I worked with for years had a few ironclad rules about investing, and one of them is to never base investing decisions on politics.

So, while we may see some heightened volatility over the next few months as the market adjusts to the new political arrangement, whatever it is, keep in mind that getting out of the market now could mean you'll miss some of the best gains it has to offer.

Matthew Benjamin 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.