Winter of Discontent
In the spring of 1978, Californian homeowners ran out of patience. Years of inflation had pushed up the assessed value of their houses, and their property taxes with it, until some retirees could no longer afford homes they had owned for decades. On 6th June, almost two voters in three approved Proposition 13, which capped property taxes at 1% of assessed value and rolled assessments back to their 1976 levels. It was the start of a taxpayer revolt across the country. Five months later, Americans voted in a midterm election with consumer prices rising by more than 8% a year and the Federal Reserve having raised its policy rate by two and a half percentage points since January. On the surface, the result looked mild: Jimmy Carter’s Democrats lost about fifteen House seats and three in the Senate and kept large majorities in both. But the wind was already turning: voters in about a dozen states, from Michigan to Texas, approved limits on taxes or public spending.
The discontent was not American alone. Across the major economies, a decade of inflation had been eroding wages and patience, and the oil shock of 1979 would make it worse. In Britain, a government trying to hold pay rises to 5% with inflation near 10% faced a winter of strikes, with rubbish piled high in Leicester Square and gravediggers walking out in Liverpool. On the day of the general election in May 1979, a tabloid borrowed a line from Richard III to name the season that had just ended: the Winter of Discontent. Margaret Thatcher won that election, and in November 1980 the same discontent cost the Democrats both the White House and the Senate. Widespread anger over the cost of living is among the oldest forces in democratic politics, and it tends to erupt at the ballot box.
Forty-eight years later, the backdrop looks familiar. An inflationary blizzard is again sweeping across the major economies: euro area prices are rising at their fastest pace in three years, and the European Central Bank and the Bank of Japan both raised rates in September. The discontent has already reached the streets: in mid-October, hundreds of thousands protested over the cost of living in France, in some of the most violent demonstrations in years, and the unrest spread to the cities of northern Italy. In the United States, the storm now meets the voters. On 3 November, Americans vote with inflation rising, the Federal Reserve raising rates, and only one voter in five approving of the President’s handling of the cost of living. If polls are to be believed, they are about to show how fast the ice is cracking beneath the President’s party.
The most common question is who will win. The more relevant questions are whether it matters for markets, and what the season after the vote has in store.
The Prevailing Wind
The first part of the answer is that the outcome is rarely a surprise. Since the Civil War, the President’s party has gained seats in the House at only four midterm elections: 1902, 1934, 1998 and 2002. The Italian economist Alberto Alesina, writing with Howard Rosenthal in 1989, explained why: this is not simply protest, but design. Americans elect a president from one of two polarised parties and then, halfway through his term, deliberately use Congress to pull his policies back towards the centre. The midterm is a counterweight built into the machine; discontent only decides how much pressure it applies.
If the check is built in, it should come as no surprise, and this year, it will not. The President’s approval rating has fallen to about a third in several polls, the lowest of his second term. Betting markets see a Democratic House as all but certain, at about 90%, and give the Democrats roughly two chances in three of taking the Senate too. Either way, voters would be doing what Alesina described: reining in a second-term president, as they did in 2006.
Once delivered, the check has rarely left investors out in the cold. Since 1950, the S&P 500 has gained about 16% on average in the year after a midterm, whichever way Congress went, with only small differences between outcomes: when the opposition held both chambers, when Congress was split, and when the President’s party kept control. Across only nineteen elections, differences this small mean little.
Gathering Clouds
If the result matters less than it seems, the calendar matters more. Midterm years have a bad reputation, and it is partly deserved. Returns have been weaker on average, but not reliably so. What is reliable is turbulence: at some point in a midterm year, the S&P 500 has fallen 16% from its peak on average, against 11% in other years.
This year, the clouds have been slow to gather. Even during the March oil shock, the S&P 500 never fell more than 10%. Then the wind rose. Technology shares ended October about 9% below their peak, hit at the end of the month by doubts about the payoff from AI spending. Even so, the S&P 500 finished the month up about 11% for the year. The usual pre-election clouds have gathered, if late.
Clearing Skies
If history is any guide, the tension will not outlast the vote by much. In eight of the last nine midterms, market volatility fell in the week after the vote. The storm abates quickly.
Then the season turns. Since 1950, the S&P 500 has risen in the year after every midterm, nineteen times out of nineteen, gaining 16.5% on average: more than twice the 6.8% of other years over the same months. If most calendar patterns in finance fail scrutiny, this one endures. It has held whichever party won, and regardless of how far the market had fallen beforehand.
Why the rally happens is less certain than that it does. Alesina’s theory explains why the result matters little: the check is expected. William Nordhaus offered a reason for the strength that follows: the year after a midterm is the run-up to the next presidential election, when incumbents have every incentive to keep the economy buoyant. The evidence is mixed, but one detail matters for 2026: when the President could not run again, the rally has been smaller on average.
A second detail concerns the vote itself. When the ruling party lost full control of Washington D.C., as is likely this year, the rally started more slowly, but it had caught up within a year. When the winds of discontent have blown hardest at the ballot box, they have delayed the blossoming, although they have not cancelled the summer.
Nineteen out of nineteen is a pattern, not a law. It describes what has happened, not what must; clear skies after a storm are a habit of the season, not a promise of the forecast.
The Climate Beneath
While the weather of the vote will clear, the climate beneath it will persist. This year has been shaped by a long chain of events, from geopolitics to prices, from prices to rates and from rates to valuations, and none of these links is expected to be unshackled by the ballot.
Today’s climate was set by the oil shock of the spring. Geopolitical tension has averaged its highest in four decades this year, and it has filtered into markets through energy. Inflation has climbed from below 3% in December to nearly 4%. Rising inflation has weighed on midterm years before, though rarely on the year after the vote. But the closest precedent is sobering. In 1978, with prices rising by more than 8%, the rally after the vote was among the weakest on record.
Rates have followed. The Federal Reserve resumed hiking in September, and bond markets have gone further. Yet inflation has risen faster than the Fed’s rate, which in real terms is now barely above zero: the mark of a central bank behind the curve, as in 1974 and 2022, two of the weakest midterm years although both were followed by a rally. Further out, inflation-adjusted bond yields reached their highest since 2008 in early October.
Equities have so far weathered the storm, because profits have done the work. Earnings are growing by about 30% a year, so shares look reasonably priced on the profits expected ahead, even if they are expensive on those already earned. But margins are near record levels, part of the growth comes from the very oil shock that feeds voters’ discontent, and analysts expect it to slow sharply by mid-2027, as the first six months after the vote come to an end. With shares offering only a slim premium over inflation-protected government bonds, the ice is thin.
None of this has prevented a post-midterm rally before: in years of rising inflation, rich valuations or geopolitical tension, the year after the vote was still positive every time. When rates were rising sharply, however, the first six months delivered little more than half the usual gain.
The Long-Range Forecast
Our long-range forecast therefore comes in two parts. For the weather, the outlook is fair: the vote of 3 November is likely to produce exactly the counterweight Alesina described, and markets have rarely been hurt by it. For the climate, it is more mixed: the forces that will shape 2027 lie in inflation, rates and valuations rather than in the ballot box, and we would expect the first months after the vote to deliver less than their historical average.
We would not sell US equities because of the election, nor buy them because of the calendar. We remain constructive on US equities, but selective, with a preference for quality companies with visible earnings growth and exposure to structural investment trends. The election on its own does not justify a change in allocation. The climate, however, calls for some caution: higher energy prices and tighter financial conditions have made the risk-reward in high yield less attractive, so we have cut our high-yield exposure by half and moved the proceeds into sovereign bonds, which should offer better protection if growth cools or sentiment sours.
Richard III is usually quoted as if it announced a looming winter. In fact, it announces the end of one: “Now is the winter of our discontent / Made glorious summer by this sun of York.” Nineteen times out of nineteen since 1950, the months after a midterm have been such a summer for equities. In 1978, when the discontent was about prices, the summer came but stayed pale, and this year’s discontent is of the same kind, if not of the same degree. The winter of the vote will pass; how glorious the summer proves will depend on the climate beneath it.
