The US midterm elections have concluded. The result has been an unambiguous sweep by the Democrat party, which has officially secured a majority in both the House of Representatives and the Senate. The question now turns to what happens next, and what the consequences are for financial markets at large. Fortunately, there is an overwhelming amount of historical data from which we can formulate an answer. The incumbent party losing the midterms is a highly predictable event; only the extent of the defeat presents any real variability. The subsequent performance of the stock market exhibits a similarly consistent path. The two years following the midterms are typically characterised by political stalemate. One party has significant control over the US Congress, while the other retains the Executive Office of the President. The divided government neuters political action and legislative progress, resulting in an endless back-and-forth period during which very little is accomplished. In short, nothing gets done because no one can agree on anything. Congress cannot successfully enshrine a bill into law without the consent of the president, who maintains the power of veto to reject any piece of legislation they please. The one exception to this is if the opposing party enjoys a two-thirds majority in both the House of Representatives and the Senate, allowing it to bypass such presidential powers. As it stands, the Democratic contingent benefits from neither. Republicans lack the numbers to pass bills and Democrats lack the numbers to override vetoes. The result is a political standstill, which is exactly what investors want. Stability in government is the ideal foundation for financial markets. Corporate tax changes, spending programmes, new regulations and legal changes become extremely unlikely in the two years following midterm elections. No surprises, no drama, no unforeseen legislative changes, just boring political gridlock, which is what Wall Street craves above all else. What follows is an amazingly consistent historical trend: the S&P 500 has risen in the 12 months after the midterms for every period since 1942. Moreover, the index has delivered significantly higher returns in the 12 months following the midterms compared to other years of the presidential election cycle, averaging 15-20% during these periods. With the obvious caveat that past performance is not indicative of future results, said results are nevertheless interesting. The initial fall in tech stocks as the ballots trickled in on Tuesday night caused a major flush of US stock market futures, but by the time the Wednesday regular session rolled around, investors were piling back into the New York and Nasdaq stock exchanges. The uncertainty is over and financial markets are eager to move on to the next chapter. Punitive AI regulations are unlikely to materialise any time soon, although such fears will undoubtedly linger in the back of the minds of many founders. The recognition by the Trump administration of the unpopularity of the Iran war also helped to lift hopes that the conflict may be brought to a close over the coming months, hence the sharp drop in crude oil prices yesterday. Cryptocurrencies were equally quick to adapt to the new paradigm, with Bitcoin gaining a solid 4% on Wednesday despite the initial selloff. Fundamentally, as far as crypto is concerned, the legislative landscape is now looking far worse compared to the previous two years. The crypto-friendly Clarity Act is essentially dead, while firmly anti-crypto figureheads could soon take control of the Senate Banking Committee. And yet, over the next two years, no one can really lay a hand on cryptocurrencies. Furthermore, the SEC and CFTC remain vocally supportive of the industry and will continue to push forward with their own rules in circumvention of Congress. The previous two election cycles witnessed strong appreciation in crypto markets, not necessarily in the 12 months following the midterms, but more so in the interim period between the midterms and the subsequent presidential inauguration 2+ years later. Bitcoin fell from $6,000 to $3,000 immediately following the 2018 midterms but went on to hit highs of $65k in early 2021. The pattern repeated four years later; Bitcoin fell from $21k to $15k immediately after the 2022 midterms, only to surpass the $100k mark in early 2025. Once again, past performance is not indicative of future results. About the Author Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment.
