You may not realize that midterm years drastically underperform the average. Those who were around for 2022 saw this firsthand when the S&P 500 Index (^SPX) fell 19% due to runaway inflation. Plus, prepare for new leadership, advises Lucas Downey, co-founder of MoneyFlows.
Before 2022, 2018 was a tough year as stocks shed 6%. Turns out this weakness has been around for decades. Since 1960, midterm election years have returned an average -1.1% for the S&P 500:
I should also point out that pre-election years (2027) tend to be violently positive with average returns of 17.2%. So be careful zipping up the bear suit too tight. Instead, expect a higher level of choppiness.
If we look at monthly returns for midterm years more recently since 1990, you’ll find overall ho-hum returns January through September, then a boost in early Q4. The main takeaway is that stocks usually struggle heading into September, before a big ramp typically in October.
Plus, as I stated earlier, be open to a change in leadership. We could be staring at a sidelined tech sector while value-oriented areas surge due to falling interest rates. As of this week, estimates point to a lowly 3% federal funds rate by next summer. I believe this is partly why value plays have been rising recently – to get ahead of this macro shift.
Small-caps as defined by the S&P Small Cap 600 have gained 4.5% in the last month. Healthcare stocks have surged 6.8%. Energy stocks have gained 5.3%, while materials, staples, and financials have all held up well. The one lagging area has been technology stocks, down 1.3% over the same period.
This is why tracking money flows is so powerful. You can get up to speed on tomorrow’s biggest trends, early. And with 2026 being a midterm year, be on the lookout for rotations. We will find the outliers…and bring them to you each and every week.
