Mid-term stock market curse and what comes next

As we reach the mid-point of the year, we need to face the unpleasant history of mid-term election years as the worst year of the four in a four-year investment cycle.  Here’s the good news: The flip side of such a dismal historical track record is the 6-12 months following each mid-term election – netting the strongest market surge of the four-year cycle, by far – partly due to the inevitable hope (“this time is different”) a new Congressional mix will somehow solve all our problems, since all we need is to create more checks and balances in Washington.A history of mid-term market declinesMost mid-term downers were caused by external events more than the market’s internal health. To demonstrate that, let’s review the 10 (of 11) downers since 1962:1962 featured two external crises: the real one, in October, was the Cuban Missile Crisis, but the earlier crisis was when the market tanked, during a spring war between President Kennedy and U.S. Steel. The Dow fell 27% from December 13, 1961, to June 26, 1962, but then it gained 85.7% by February 9, 1966.1966 delivered a short recession disguised as a “credit crunch,” running from February to October, delivering a 25.2% haircut in eight months, followed by a major market recovery in 1967 and 1968.1970 brought a tech-stock crash similar to the dot-com bubble of 2000, as the Nifty 50 and an array of computer and software stocks fell up to 80% in the second quarter of 1970. Then came a 50% rebound.1974 capped the worst long-term market collapse (in real, after inflation terms) in the postwar era. The primary cause was the OPEC oil embargo of late 1973, tripling gasoline prices, but we also had major drains coming from the endgame in Vietnam and the Watergate crisis, with President Nixon’s resignation. Then came Ford’s attempt at healing us, and the best single market year since the 1950s, +38% in 1975.1978 brought a second oil shock, exacerbated by Carter’s new Department of Energy, resulting in long gas lines and sky-high prices, yielding a sense of malaise and Carter’s loss to Reagan in a “misery index” peak year (1980) of 20% interest rates, 12% inflation and 11% jobless rates – but a 15% market surge.Related: Backlog Mania: Stocks to Watch This Earnings Season1982 delivered the second of a “double-dip” recessionary blow at the start of Reagan’s first term, in the steep (but mercifully short) inflationary recession of 1982, ending suddenly, with 15-fold gains, 1982-99.1990 followed Saddam Hussein’s August invasion of Kuwait. The Dow fell 21.2% from July 17 to October 11, 1990, then rose 20.3% in 1991 and 4.3% in 1992.1994 followed the Federal Reserve’s sudden rate-hiking campaign under Alan Greenspan in a fight against phantom inflation. The Dow fell 9.1% from January 31 to April 19, 1994, then rose 33.5% in 1995 and 26% in 1996.The 1998 decline stemmed from the collapse of the Long-Term Capital Management hedge fund. The Dow fell 29.7% from July 17 to August 31, 1998, then rose 16.1% in 1998 and 25.2% in 1999.2002 marked the final dismal market spasm of the dot-com bubble, compounded by post-9/11 fears. The Dow fell 31.5% from March 13 to October 9, 2002, then rose 25.3% in 2003 and 3.1% in 2004.In 2018, new Fed Chair Jerome Powell raised interest rates one time too many, perhaps in defiance of President Trump’s multiple Tweets not to hazard such a destructive move. The President was right, but wrong in his meddling ways, as the market tanked in December 2018. The Dow Industrial Average fell by nearly 20% from its early October 2018 peak, delivering its worst December performance since 1931.In 2022, the Fed’s delay in raising rates to fight what they called “transient” inflation increases in 2021 led to a 21% decline in the Dow over the first nine months of 2022 before recovering strongly since then.The market welcomes political resetsOne of the major causes of the big recoveries following mid-term elections is the “restraining orders” placed on one-party power monopolies during these elections. The last four incumbent presidents suffered massive reversals of their seats in Congress in 1994 (Clinton), 2006 (Bush), 2010 (Obama) and 2018 (Trump), and it could happen again in 2026. Voters like to think they have some veto powers.We don’t yet know if President Trump will receive a second mid-term spanking in November 2026, but American voters have this “get out of electoral jail free” card every mid-term. The market likes that, too.Overall, the lesson history teaches is to enjoy the second half of 2026 by ignoring any big drawdowns and remembering those forthcoming fourth-quarter surges.Related: Louis Navellier flags three top tech stocks for market growth