S&P 500 after midterm elections: what history says and where the market stands

The S&P 500's performance in the weeks following midterm elections has shown a clear pattern, according to historical data. In the days immediately following 14 out of 19 elections, the index was higher. However, by the second week, this positive trend shifted, with only 10 of the 19 elections resulting in a gain. After one month, the odds improved again, with 15 of the 19 elections showing a positive movement.

The exact reason why this pattern occurs remains a topic of debate. Many believe that uncertainty clears and gridlock reduces policy surprises, leading to a more stable market. Others argue that the profitability of companies and the policy decisions of the administration have a more significant impact on the market over the next 6-12 months.

Betting markets implied a high chance of a Democratic House and a roughly 50-50 split in the Senate, according to UBS's September 20 note. While seasonality typically favors the 12-month view, it's important to note that these numbers are derived from a small sample of 19 elections. The first two weeks following an election are less reliable indicators, and the current market drawdown and loss of shorter-term averages suggest that the market is entering the election period with damaged momentum.