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Featuring

Chris Galeski, Director of Growth and Advice and Partner, Morton Wealth

Meghan Pinchuk, Chief Investmnet Officer and Partner, Morton Wealth

Every election cycle, clients ask the same question: should I be doing something different with my portfolio right now? The short answer, according to the data, is probably not. But the longer answer is more interesting.

In this episode of Financial Commute, Chief Investment Officer Meghan Pinchuk and Chris Galeski walk through what historical market data actually shows about midterm election years, why the bigger risk to the current market has less to do with which party wins and more to do with what both parties agree on, and how to think about sizing your stock exposure when markets are expensive, uncertainty is high, and the outcome of any given election is genuinely unknowable.

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Key Takeaways

• Midterm election years have historically been associated with weaker short-term market performance, but 95 percent of the time the market was higher twelve months after any election. The uncertainty that elections create tends to produce more short-term volatility. But the data, including Fidelity research going back to 1938, consistently shows that markets recover and move higher in the year following midterm elections, regardless of which party wins.

• Divided government has historically produced better average stock returns than single-party control. The S&P 500 has averaged a 9.9 percent return under divided government compared to 8 percent under single-party control. The theory is that gridlock forces compromise and prevents extreme policy swings, which markets tend to reward over time.

• The bigger near-term risk to the market is not which party wins, it is what both parties agree on. Both Democrats and Republicans have expressed strong opposition to new data center construction in their communities. With 81 percent of Democrats and 57 percent of Republicans opposing local data centers in polls, there is a rare area of bipartisan agreement that could meaningfully slow the AI infrastructure buildout that has driven roughly 50 percent of US stock market growth this year.

• Inflation is a hidden tax and the Fed is in a genuinely difficult position. Higher rates slow the AI spending that is driving earnings growth. But keeping rates low while inflation is elevated punishes consumers and savers. Meghan describes the government's preferred path as letting inflation run slightly above rates over time, using it to gradually inflate away the national debt, which has now reached approximately $40 trillion.

• Getting your stock exposure right before the uncertainty resolves is what matters most. Both Meghan and Chris emphasize that the question is not whether to own stocks. It is whether you own the right amount given current valuations, your financial plan, and how much volatility you can withstand without making an emotional decision that derails your long-term strategy. That calibration has to happen before the event, not after.

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Key Moments from This Episode

0:00 – Intro: midterm elections, market volatility, and what actually moves stocks
1:13 – Welcome and today's topic: how elections affect your investments
2:04 – Markets don't like uncertainty, but 95% of the time they're higher 12 months later
2:53 – Does it even matter if there's a divided government?
4:00 – The real driver this year: 50% of US market growth came from AI and tech spend
5:13 – Bipartisan opposition to data centers: what that means for AI spending
7:38 – Inflation, interest rates, and the Fed's impossible balancing act
10:14 – Divided government has historically produced better market returns
11:16 – How to size your stock exposure before the outcome is clear
13:03 – Selling the cheap thing and buying the expensive thing: the trap to avoid
16:28 – The lost decade: why price-to-earnings ratios matter more than election results
17:31 – Closing take: elections matter less than the policy decisions that follow

Questions This Episode Answers

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Do midterm elections affect the stock market?

In the short term, yes. Markets tend to be more volatile during election years because uncertainty about policy outcomes makes investors cautious. Fidelity research going back to 1938 found that midterm election years have often been associated with weaker market performance. But 95 percent of the time, markets were higher twelve months after the election. The pattern suggests that elections create noise in the short term while the underlying economic and earnings fundamentals tend to reassert themselves over the following year.

What would slow down AI spending and why does that matter for the stock market?

Roughly 50 percent of US stock market growth this year has been attributed to technology spend, driven by companies investing heavily in AI infrastructure. A significant portion of that spend goes toward data centers. What Meghan describes as unusual is that opposition to new data center construction has emerged as one of the few areas of genuine bipartisan agreement: 81 percent of Democrats and 57 percent of Republicans in polls oppose new data centers in their local communities. If regulatory or policy pressure slows the data center buildout, it could slow the AI spend that has been propping up earnings growth, which would remove a meaningful driver of recent market performance.

Why is inflation described as a hidden tax?

Chris uses this framing because inflation reduces purchasing power gradually and without a visible line item. Unlike income taxes, which appear on a pay stub, inflation shows up as your grocery bill being higher, your gas tank costing more, and your dollar buying less than it did a year ago. Most people do not track these changes precisely enough to feel the full cumulative impact. Meghan adds that for the government, allowing inflation to run slightly above interest rates over time is effectively a strategy for making the $40 trillion national debt cheaper to repay in real terms, by paying it back with dollars that are worth less.

How should I invest before an election?

Neither Meghan nor Chris recommends making significant portfolio changes based on election predictions. The historical data does not support that approach. What they do recommend is making sure your stock exposure is sized appropriately for your financial plan and your risk tolerance before the uncertainty resolves, because that calibration is much harder to make well once events are already unfolding. If a significant market decline would force you to change your spending, alter your retirement timeline, or cause you to sell at the wrong moment, your stock exposure may be too high regardless of what the election does.

What does the current price-to-earnings ratio tell us about future stock returns?

Chris points to the historical pattern: the market's P/E ratio was in the low to mid 20s at the peak of the dot-com bubble, after which stocks were essentially flat for a decade. The market's P/E ratio in 2009 and 2010 was in the low 10 to 12 range, after which the market performed exceptionally well for 15 years. The current P/E ratio is again in the mid to low 20s. Neither Meghan nor Chris predicts what the next ten years will bring. But the valuation context is a meaningful input into how much stock exposure makes sense right now and how much caution is warranted.

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Why This Matters for Investors Navigating Election Season Uncertainty

Election years tend to generate a lot of noise that feels like signal. Headlines move markets in the short term, and the temptation to act on that noise is real. This episode is useful for anyone who finds themselves wondering whether to do something different with their portfolio because of what is happening in Washington, and wants a data-grounded perspective before making a decision.

• Investors who are feeling anxiety about market volatility as elections approach and are wondering whether to reduce stock exposure or move to cash
• Anyone trying to understand how AI data center policy, interest rates, and election outcomes connect into a coherent picture of near-term market risk

At Morton Wealth, we think the most important thing an investor can do heading into any uncertain period is make sure their portfolio is built for a range of outcomes, not for one prediction. If you are unsure whether your current allocation reflects the right level of risk for your plan, that is the conversation to have now rather than after the fact.

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Relevant Content

How Do You Build a Portfolio That's Ready for Uncertainty?

When Headlines Get Loud, Principles Matter More

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Disclosures: Information presented herein is for discussion and illustrative purposes only and is not intended to constitute financial advice. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax, or legal advice. You should consult with your financial professional, accountant, or tax professional before implementing any transactions or strategies concerning your finances.