The market didn’t vote on November 3

By Will Hubbard

When markets and politics come up in conversation, I routinely tell people that politics are fun to discuss, but markets don’t care about your politics—or mine. Still, every two years, investors ask the same question: “What does this election mean for my money?”

We turn to politics for understandable reasons. “Democrats took control of Congress” feels like a better explanation than admitting markets are noisy. Depending on your political leanings and how you inflect your voice, you could be celebrating or lamenting that statement. It can also feel good to blame the party we don’t like for whatever happens next. And because politics is part of our identity, it tints our view of markets a little red, blue, or purple. The same investor can be bullish under one party and bearish under the other simply because of where they fall on the political spectrum.

History gives us useful context, not a playbook. The better question isn’t “Who won?” It’s “How do I stay invested when markets get rough?”

What history tells us about midterms

Looking at the 38 midterm elections from 1874 through 2022, we can see a pattern, but it’s weak. Following those elections, the S&P 500 rose an average of 10.1% over the next 12 months, measured from the Oct. 31 close, and was higher a year later 76% of the time. Over the same 12-month period in every year since 1874, the average return was 6.5%. That suggests people may experience some relief following midterms, though it’s hard to separate that effect from the usual market noise.

Sorting the results by changes in control of Congress complicates the picture. In the 10 midterms when at least one chamber moved from Republican to Democratic control, the average 12-month return was just 3.9%. In the eight elections when control moved from Democratic to Republican, it was 11.6%.

With only 10 cases, though, one bad year can have an outsized effect. In 1930, President Hoover’s Republicans lost the House as the Great Depression took hold, and the S&P 500 fell 38.4% over the next year. In 1882, it fell 11.4%. Without those two years, the other eight flips averaged 11.1%, right in line with the Democrat-to-Republican flips.

To be blunt, the Great Depression is certainly an outlier that not many people are alive to remember anymore, and I had to do a Google search to see what happened in 1882. An associate of Thomas Edison created the first electric Christmas tree lights, and Standard Oil was incorporated on Aug. 5. Drawing relevance to today is going to be a real challenge with those highlights.

What happens when markets turn?

If we remove the political glasses, the more useful question is how to prepare for what comes next, whatever that might be. Trying to predict election outcomes doesn’t necessarily help investors make better decisions, but we can take steps to manage portfolio risk when uncertainty shows up as volatility. One tool worth a closer look is trend following, often employed by commodity trading advisors (CTAs), also known as managed futures.

CTAs typically follow trends in futures markets, including stocks, bonds, currencies, and commodities. Because they can take short positions, falling markets don’t automatically result in losses for these strategies. To examine a longer history, we used AQR’s Time Series Momentum factor, a research-based proxy for trend following with monthly returns dating to 1985. It is hypothetical and not investable, but it provides an independent data source for examining when trend following has historically performed well or poorly.

From 1985 through May 2026, the proxy’s monthly correlation with the S&P 500 was essentially zero, at -0.07. This low correlation suggests that trend following may provide diversification benefits because its returns have not closely tracked those of stocks. The S&P 500 experienced seven drawdowns of 15% or more during that period, and the proxy gained in six of them (see the following table). It also posted positive returns in eight of the market’s 10 worst months. A 2017 study by Hurst, Ooi, and Pedersen extended the historical analysis of trend following back to 1880 and found positive returns in eight of the 10 worst drawdowns for a 60/40 portfolio.

Where trend following can fall short

Trend following is not a free hedge. A market crash can happen faster than trend-following strategies or CTAs can react. In choppy, directionless markets, trend followers can lag for long stretches as they get whipsawed by trading to identify trends that never materialize. These strategies also experience their own drawdowns, but those historically tended to occur at different times than stock market declines, contributing to their generally low correlation with stocks.

The asset class has gone in and out of favor. CTAs did well in the 2008 financial crisis, and investment dollars followed. Then came a decade of near-zero interest rates, when CTAs earned almost nothing on the cash behind their positions. Returns languished, and many investors lost interest. Since 2022, interest has returned as investors have increasingly recognized the potential value of holding an asset with low correlation to stocks, even during periods of underperformance.

Focus on what you can manage

The emotional noise around the midterms is fading, and history favors staying invested. Average returns in the year following a midterm have been positive regardless of which party gained control of Congress, though not every period has produced gains.

Rather than trying to trade election outcomes, investors may be better served by focusing on how their portfolios are positioned for changing market conditions. That’s central to Flexible Plan Investments’ (FPI’s) investment approach. FPI uses quantitative, data-driven strategies to help manage risk and adapt to market trends without relying on political predictions. Approaches such as trend following may also provide diversification benefits when traditional stocks and bonds struggle.

No strategy works in every market environment. But combining different approaches to managing risk can help investors build portfolios that are better prepared for a range of possible outcomes, regardless of which party is in power.