Mid-term years have a habit of delivering a scare

Looking back over previous U.S. mid-term election years, the S&P 500 .SPX has experienced an intra-year pullback in every cycle since 1974.

Markets suffer setbacks in most years anyway, with the typical drawdown running at around 14%. What stands out is the scale. Data compiled from past mid-term cycles show declines averaging close to an estimated 18%.

The pattern does not imply that 2026 will follow the same path. It does, however, show that drawdowns in mid-term years have historically been deeper than those seen in the average calendar year.

Another factor this year is the Federal Reserve leadership transition. Kevin Warsh has been Fed chair for less than two months.

The last time a new Fed chair took office during a mid-term election year was 2018, when Jerome Powell succeeded Janet Yellen. That year, the "Volmageddon" volatility shock hit markets in February, and the S&P 500 later fell nearly 20% from its peak to its Christmas Eve low before rebounding in 2019.

The encouraging part of the historical pattern comes after the selloff. Periods following mid-term lows have historically coincided with some of the strongest returns in the four-year U.S. presidential cycle.