The midterm paradox Voters want change, markets prefer gridlock

With just nine weeks until midterm elections, voters are demanding answers on the issues that matter most: the rising cost of living, the economy, immigration and border security, and healthcare.

Rising voter discontent and historical election patterns point toward divided government, an outcome that has often meant fewer sweeping policy changes.

Yet while voters loathe gridlock, capital markets often prefer it. Fewer legislative surprises can allow fundamentals, rather than politics, to play a larger role in driving returns.

The path to a divided government

Increasingly frustrated by Washington’s inability to deliver results, voters have become more willing to support candidates from both the far left and far right. More House incumbents—Republicans and Democrats alike—have lost their 2026 primaries than in any year since 1948.¹ Generational change is eroding the traditional advantages of incumbency. Roughly 26% of Americans, the “double haters,” now view both parties negatively. That’s the highest level ever recorded.²

According to Baird Strategas, the political party in power has changed in nine of the past 10 midterm and presidential elections. That ties the current period with 1878-1896 for the highest level of political turnover in US history³ and underscores that policy permanence does not exist in Washington. The executive orders of one administration are reversed by the next and the tax hikes of one Congress are the tax cuts of the next.

Polls and prediction markets suggest that divided government is the most likely outcome of the midterm elections in November (Figure 1). That’s hardly a bold forecast. The president’s party typically loses about 27 House seats on average in midterm elections because several forces work against the incumbent party.⁴

Midterms are less about choosing a president than checking one.

Should history repeat itself in November, Democrats would gain enough seats to reclaim the House majority. Democrats have momentum and massive voter turnout on their side but face a daunting fundraising and electoral math problem in their bid for a Senate majority. To get there, they’ll need to run the table in the key swing states and flip at least two red states. A Democratic Senate majority isn’t impossible, but it remains improbable.

Divided government may continue to frustrate voters seeking answers, but for investors prepared to navigate heightened market volatility, it could create new opportunities.

Election-year volatility, post-election resilience

Investors have spent most of 2026 climbing a wall of worry—from Greenland and tariffs to Fed independence, war with Iran, oil shocks, inflation, rising bond yields, and AI skepticism. Yet each time, markets have demonstrated remarkable resilience.

That resilience may be tested in the weeks ahead. Midterm election years have historically been more volatile. According to Baird Strategas, the average intra-year S&P 500 drawdown is 19%, versus 12% in the other three years of the presidential cycle.⁵

And the timing could hardly be more challenging. Mid-August through mid-October has been one of the most volatile stretches of the market calendar, with September ranking as the S&P 500’s weakest month and October among its most volatile. In midterm election years, the seasonal turbulence can be even more pronounced.⁶

But the year after the election has historically delivered strong returns. The S&P 500 has not declined in the 12 months following a midterm election since 1930. The average post-midterm price return is 14% (Figure 2).⁷

Political uncertainty produces volatility, but the post-election period has rewarded investors who stayed the course.

Politics may shape markets, fundamentals drive returns

The midterms add another unknown to a year already defined by uncertainty and geopolitical tensions. But positioning portfolios is less about predicting who wins and more about focusing on the fundamentals.

Regardless of the outcome, the takeaway for investors is clear: stay focused on long-term objectives, remain disciplined through periods of volatility, and avoid letting election headlines or outcomes drive portfolio decisions.