The 2026 Midterms: Why November Matters, And How Markets Could Move

Key Points

On November 3 voters decide the House, a third of the Senate, and 36 governorships — and with them, who writes tax law.
Midterm years are the choppiest of the four-year cycle, averaging an 18% to 20% drop at some point during the year.
That fear has a calendar. It usually peaks in September and October, then fades once the result is known.
Here is the part almost nobody knows: the S&P 500 has never lost money in the 12 months after a midterm since 1962.
So we do not trade the election. We hold through the noise and let the rebalancing rules do the buying.

Days until the vote

-18% to -20%

Average drop at some point in a midterm year

+12% to +16%

Average return in the 12 months after

Losing 12-month stretches after a midterm since 1962

In one line: Midterm years get ugly before they get good, the ugly part usually lands in September and October, and every single time since 1962 the year after has paid — so the plan is to sit still and let the dip do the shopping.

PATH 1

Gridlock

Split Government

Democratic House, Republican Senate — the prediction-market favorite. Big legislation stalls; markets historically like the certainty of nothing changing.

PATH 2

Blue Shift

Democratic Sweep

Democrats net +4 Senate seats and the House. Subpoenas and policy headlines re-price healthcare, energy and tax-sensitive names — louder noise than near-term law.

PATH 3

Status Quo

GOP Holds Both

Republicans defy midterm gravity. Policy continuity on taxes and tariffs; the market story stays about the Fed, earnings and AI capex — not Washington.

Why the midterms actually matter to your money

Most election coverage is noise for investors. Midterms are the exception, for four concrete reasons. They decide who writes tax law, who holds subpoena power, and how regulated industries get treated. They also decide how much volatility the market prices in while it waits to find out.

1 · The tax pen changes hands

All revenue bills start in the House. Whoever holds it controls whether the 2017/2025 tax-cut architecture gets extended, amended or contested in 2027 — capital-gains treatment, SALT caps, estate-tax exemptions, retirement-account rules. For CalSTRS/CalPERS households, pension taxation and 403(b)/457 rules ride on committee gavels, not on the presidency.

2 · Subpoena power is market power

A flipped chamber means new committee chairs with subpoena pens. A June Journal op-ed said it plainly. If Democrats take a chamber, coordinated investigations of companies that cooperated with the administration are already being mapped. For scale: the 2019–21 House held 405+ oversight hearings and made 1,318+ information requests. Oversight doesn't pass laws, but it moves individual stocks (ask any managed-care or AI executive).

3 · Regulated sectors get re-priced first

Health care (drug pricing, Medicare Advantage), energy (permitting, drilling leases), banks (capital rules), and now AI (oversight orders, federal equity-stake talk) all trade on the expected referee. The market starts re-pricing these sectors months before the vote — which is why we size positions like UnitedHealth (UNH) as starters in an election year.

4 · The volatility window is the calendar's

Midterm years average an 18–20% intra-year drawdown, with volatility historically peaking September–October and fading once the result is known. Then the pattern flips: the S&P 500 has not had a negative 12 months following a midterm since 1962. The pre-vote chop is the price of admission for the post-vote year.

There's also a 2026-specific reason: this Congress is already governing with one eye on November. Three things happened in a single week of early June. Three Republican senators in tough races (Collins, Sullivan, Husted) crossed the aisle to kill a $1.8 billion White House fund inside the $70 billion immigration bill, a 49–50 cliffhanger. The FDA timed a six-month abortion-pill study to land after the election. And Texas nominated Attorney General Ken Paxton for Senate over incumbent John Cornyn, with his consumer-protection probes doubling as campaign events. Policy is already being made on campaign time. Markets notice.

What a century of midterms says

Average intra-year drawdown

-18 to -20%

S&P 500 average max pullback during midterm years

12 months after the vote

+12% to +16%

Average S&P 500 return following midterms

Since 1962

0 losses

The S&P 500 has never been negative in the 12 months after a midterm

Midterm years are typically the weakest of the four-year presidential cycle — choppy, headline-driven, with volatility peaking right before the vote and fading after. Then the pattern flips: once the result is known, markets refocus on growth, rates, and earnings. The caveat: the worst midterm years (1974, 2002, 2022) were driven by stagflation, the tech bust, and Fed hikes — economics beats politics every time.

The 2026 map in one minute (race reporting as of June 5)

Senate: Republicans hold 53–47. Democrats need a net +4 to flip it — battlegrounds include Georgia (Sen. Ossoff defending) and open-seat Michigan. Prediction markets price it near 50/50. Wildcards multiplying: Sen. Cassidy lost his primary to a Trump-endorsed challenger, Tillis is retiring, and Ken Paxton beat Sen. John Cornyn for the Texas GOP nomination in early June.
House: All 435 seats up; early forecasts (incl. the AP's first projection) lean Democratic control. The redistricting wars are escalating into 2028: New York pre-approved an amendment that could turn its map from 19–7 to 23–3, after California's referendum produced a 48–4 map.
Governors: 36 states choose — including races that shape pension and tax policy for California public employees.
The farm-belt revolt (June 4): in Iowa's GOP governor primary, farmer Zach Lahn beat the Trump-endorsed sitting congressman 37.8%–37% — in a state Trump carried by 13. Behind it: Iowa farm bankruptcies more than doubled in 2025, net farm income is forecast down 25%, and diesel hit $5.82. The two parties are already committing $42M+ to the Iowa Senate race alone.
The early tells: vulnerable Republicans are already voting independently (June's 49–50 anti-weaponization-fund vote), and agencies are timing decisions around the date (the FDA's mifepristone study lands after the election). When incumbents start hedging, the race is genuinely competitive.
What it means: the most likely outcomes are split government or a narrow sweep — both historically navigable for diversified investors.

The road to November 3

June – August · done

Primary season wrapped and the candidate fields locked. Congress fought over the $70B immigration package and AI oversight. Markets mostly ignored all of it — earnings and the Fed ran the show, and the S&P set records into mid-August.

September · next

The historical volatility window opens. Campaign ad spending peaks, and policy-sensitive sectors — healthcare, energy, banks — start trading on poll swings. The VIX has usually peaked in September or October of a midterm year.

October

Maximum noise: closing arguments, October surprises (the FDA's mifepristone result and a Louisiana court deadline both land here). In 2022 the market bottomed three weeks before the vote — pre-election fear has historically been a buying window, not a selling one.

November 3

Election Day. House control likely known within days; Senate may hinge on close races and runoffs (Georgia's runoff rule looms again).

November – Year-End

The result gets priced in hours; the uncertainty discount comes off. Since 1962, the 12 months after every midterm have been positive for the S&P 500. Lame-duck session decides taxes and spending deadlines.

How we're positioned for it

We don't trade elections — the post-midterm record argues for staying invested through the noise.
The Capital Wealth Growth Portfolio already leans defensive into the volatility window: consumer staples and discretionary, aerospace & defense, banks, energy, and trimmed AI concentration (Broadcom was cut back to target in June).
For CalSTRS / CalPERS households: your pension horizon is decades, not news cycles. Election-year dips have historically been accumulation opportunities, not exits.
If volatility spikes pre-election, that's when rebalancing bands and cash buffers earn their keep.

More concrete history

The president's party almost always pays: it has lost House seats in 17 of the last 19 midterms — roughly 28 seats on average since WWII. Markets know this going in; it's rarely the surprise.
2022 as the template: the S&P 500 fell ~25% intra-year, bottomed in mid-October — three weeks before the vote — then delivered a full double-digit recovery in the following 12 months.
Volatility has a calendar: VIX has historically peaked in September–October of midterm years and faded into year-end once the result is priced.
Where we start from: markets enter the volatility window at records — S&P 7,798.99 (a record), DJIA 53,839.99, Nasdaq 26,803.03 at the August 13 close, with the 10-year at 4.640%. A high starting point in an election year is exactly why the drawdown numbers above deserve respect.

📒 How the Capital Wealth Growth Portfolio is set up for November

The defensive tilt is already on: Dollar General (DG, added Jun 3) for the value shopper and Macy's (M, added Jun 5) for asset-backed value. Motorola Solutions (MSI) covers public-safety spending, which gets funded no matter who wins. The aerospace and defense sleeve rounds it out.
Bipartisan beats partisan: MP Materials (MP) — rare-earth reshoring is one of the few things both parties pay for. That is the kind of exposure we want going into a coin-flip Senate.
The election-sensitive add is sized like one: UnitedHealth (UNH, added Jun 5) is a starter at roughly 1.5%. Managed care is a regulatory football in election years — good upside if nothing passes, headline risk if a sweep happens.
AI trimmed, not abandoned: Broadcom (AVGO) was cut back to target in June after its $286B repricing. Election volatility plus a stretched price is exactly why we keep any one name in check.
The plan if October gets ugly: the rebalancing bands and the Treasury buffer turn a pre-election swoon into a buying schedule. That is precisely what worked in October 2022.

📰 Companion Reading — from our WSJ coverage

Washington Wants Equity In The AI Boom — June 5 — the oversight era Rove: The Democrats' Peril — strategy The Gerrymander Wars — editorial Galston on the Upper-Middle Revolt — politics Fed Minutes: The Hike Debate — May 21 — because rates still beat politics

What It Means For The Portfolio

Hold — no election trade

We are not going to trade this election, and neither should you.

The record is blunt. Since 1962, the S&P 500 has never been down in the 12 months following a midterm. Selling into election fear has been the wrong call for sixty years running, and we have no reason to think this one is special.

What we do instead is get positioned before the noise, which is already done. The Capital Wealth Growth Portfolio leans defensive going into the window — staples, aerospace and defense, banks, energy — with AI concentration trimmed back to target. Election-sensitive names like UnitedHealth are deliberately sized small, because managed care becomes a political football every election year.

If September and October get ugly, that is the plan working, not failing. The rebalancing bands and the Treasury buffer automatically turn a pre-election drop into a buying schedule. That is exactly what happened in October 2022, when the market bottomed three weeks before the vote.

For CalSTRS and CalPERS households: your pension horizon is measured in decades, not news cycles. Election-year dips have historically been a chance to add, not a reason to leave.