The Most Volatile Year in the Presidential Cycle

• Midterm years deliver the weakest returns of the presidential cycle.

• Since 1949, markets tend to bottom around mid‑year.

• That trough is typically followed by a sharp fourth‑quarter rally.

Before we get lost in the noise, it’s worth remembering one thing: midterm election years rarely let investors get comfortable…

This year is off to a bumpy start for the S&P 500 Index. After finishing January with a modest 1.4% gain, the index has since slipped into negative territory, now down roughly 0.9% year to date. And if you’ve been following the financial media, you’d think the sky is darkening by the hour.

Commentators are pointing to everything from the White House’s preference for a more hawkish Federal Reserve chair… to corporate earnings that are “not good enough,” even though companies are reporting the highest net margins in the FactSet dataset going back to 2009… to the nonstop drumbeat that technology stocks are in a bubble. It’s a familiar pattern: when markets wobble, the headlines get louder.

But when we zoom out and look at this year through an historical lens, a different picture comes into focus. This isn’t just any year, it’s a midterm election year. Right now, the same party controls the White House, Senate, and House of Representatives. Historically, that alignment rarely survives the midterms. And the process of that shift — early campaigning, sharpened messaging, policy uncertainty — creates exactly the kind of turbulence we’re seeing today. When Wall Street can’t confidently map the political or economic path ahead, money managers tend to sell first and analyze later. That reflex is especially pronounced heading into midterms.

This is where long‑term perspective becomes essential. Wealth is built by staying focused on the destination, not the noise along the way. And if history is any guide, the destination at year end tends to be positive. The path getting there is often choppy, sometimes uncomfortably so, but the underlying structure of the presidential cycle has repeatedly supported a steady rally into year’s end.

But don’t take my word for it, let’s look at what the data’s telling us…

Midterm election years have a well‑documented rhythm, and it’s remarkably consistent across decades. The second year tends to produce the weakest returns for the S&P 500 of any year during a presidential cycle…

Surveying data going back to 1949, right after Harry Truman’s reelection, the S&P 500 has averaged roughly an 8% gain in the first year, a 5% rally in the second, a powerful 17% surge in the third, and another 8% increase in the fourth. The success rate (positive results) follows the same arc:

The first year produces a positive result about 65% of the time, the money making potential drops to 53% for the second, then the cycle snaps back with a 90% chance of positive outcome in the third, and an equally strong 84% success rate in year four. But that dip in the second year isn’t random. It’s structural.

Midterm years are the political pressure valve of the cycle. The party out of power sees its best chance to regain influence, and the campaigning starts early. Both sides sharpen their messaging, highlight each other’s weaknesses, and flood the media ecosystem with drama. Coverage turns somber, rhetoric intensifies, and markets respond to the heightened uncertainty. Sound familiar?

Historically, the second year is also the most volatile stretch of the cycle. The S&P 500 often finishes these years in the green, but almost every midterm year features a meaningful “mid‑year” selloff before the recovery kicks in. These aren’t gentle pullbacks. They’re the kind that test conviction and dominate financial news cycles. Since 1949, the average intra‑year drawdown in a midterm year is roughly 17%, according to Bloomberg data. The worst was a drop of 35.9% in 1974 while the shallowest was a 4.4% decline in 1954 and 1958. And yet, the snapback is one of the most reliable features in market history. As noted above, the third year of a president’s term tends to produce the strongest returns of the cycle.

The timing of the trough is consistent too. Late June to early July often marks the low point, right as campaign rhetoric hits peak volume. Then, as we move into late September and the election comes into focus, the market often stages a sharp rally that carries through year‑end. It’s a pattern that repeats across parties, macro environments, and geopolitical backdrops.

Bottom Line: While things may feel rough right now, this kind of turbulence is exactly what midterm years are known for. The headlines get louder, the narratives get darker, and markets chop as investors try to make sense of shifting political and economic signals.

But history is clear: these drawdowns are usually the setup, not the story. Once uncertainty begins to resolve and the election comes into focus, markets tend to stabilize, recover, and finish the year on firmer footing. If the past seven decades are any guide, the discomfort we’re feeling today is part of a well‑worn pattern that has repeatedly given way to stronger returns on the other side.

Five Stories Moving the Market:

Amazon said it expected to make capital expenditures of $200 billion in 2026, up 56% over last year, as the company accelerates spending in artificial-intelligence projects; Amazon forecast first quarter revenue of between $173.5 billion and $178.5 billion and operating profit of between $16.5 billion and $21.5 billion compared to the consensus expectations of $175.2 billion and $22 billion respectively – WSJ. (Why you should care – the guidance is stoking concerns that spending on building new AI data centers is outpacing revenue from selling these services to customers, potentially weighing on profitability)

Anthropic is releasing a new version of its most powerful AI model that’s designed to carry out financial research, days after the company’s push into legal services upended the stocks of legacy software makers; the company unveiled Claude Opus 4.6, which it says can scrutinize company data, regulatory filings and market information to come up with detailed financial analyses that would normally take a person days to complete – Bloomberg. (Why you should care – the announcement stoked concerns about the ability of AI functions to replace existing products, instead of focusing on potential efficiency gains)

A landslide win for Japan's ruling Liberal Democratic Party (LDP) at Sunday's election may be the best outcome for bonds and the yen, even as Prime Minister Sanae Takaichi's spending pledges have repeatedly rocked markets – Reuters. (Why you should care - an overwhelming LDP victory would be a positive as it would eliminate the need for Takaichi to negotiate with opposition parties, who are touting even deeper tax cuts and broader fiscal spending, giving her a freer hand to respond to pressure from markets)

Bank of Canada Governor Tiff Macklem warned that cutting interest rates while the economy is adapting to structural changes risks stoking future inflation; Macklem stated that while monetary policy can help with structural adjustments, the tool can’t restore lost efficiency from trade friction – Bloomberg. (Why you should care – Macklem is making the case for why the central bank should remain on hold until a trade resolution is worked out between the U.S. and Canada)

The U.S. job market is off to a rough start in the new year, with companies announcing more layoff plans after freezing out job seekers, cutting back on hiring, and rattling markets – WSJ. (Why you should care – continued labor market weakness could force the Federal Reserve to introduce economic support sooner than current June expectation) 

Economic Calendar:

Earnings: AN, BIIB, CBOE, MKTX, NWL, PM, TM, UA

New Zealand – National Day

RBA’s Bullock (Governor) Speaks

Japan – Household Spending for December

Germany - Exports, Imports for December (2 a.m.)

Germany - Industrial Production for December (2 a.m.)

France - Exports, Imports for December (2:45 a.m.)

BOE’s Pill (Chief Economist) Speaks (7 a.m.)

U.S. – Average Hourly Earnings for January (8:30 a.m.)

U.S. – Nonfarm, Private, Manufacturing Payrolls for January (8:30 a.m.)

U.S. – Unemployment Rate for January (8:30 a.m.)

Canada – Employment Change for January (8:30 a.m.)

Canada – Unemployment Rate for January (8:30 a.m.)

U.S. – University of Michigan Consumer Sentiment for February (10 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)