The Upcoming Midterms: Distraction or Decision Point?
In June 1858, Abraham Lincoln accepted his party’s nomination for the U.S. Senate with a line borrowed from the Gospel of Mark: “A house divided against itself cannot stand.” He was speaking about slavery, a division far graver than anything that separates the parties today. But the phrase has outlived its moment, and it returns every election season as shorthand for a government split between parties.
It may describe Washington again soon. The midterm elections are November 3, and at this writing, prediction markets put the odds of Democratic control of the House above 90 percent. With a Republican in the White House, that outcome would produce a divided government (either the House or the Senate can divide the government). That’s not a forecast or a prediction, just a plausible scenario, and it invites a question many investors are already asking: what happens to markets when the house is divided? Would it be a sell signal, a buy signal, or just more noise?
A Futile Search For Certainty
The honest answer is that it depends on who is counting, and what they’re counting.
One analysis of Wall Street Journal data from 1929 through 2019 found almost no difference: average annual S&P 500 returns of 7.45 percent under unified government and 7.26 percent under divided government. Retirement Researcher, analyzing 1926 through 2023, found unified government well ahead, 14.14 percent to 10.18 percent. Research from the Carson Group covering 1951 through 2023 found the reverse, with divided government leading 9.9 percent to 8 percent. A paper by researchers affiliated with the University of Oxford went further, finding that from 1927 through 2017, stock returns above Treasury bills averaged 10.7 percent a year under unified government and less than 1 percent under divided government.
Each of these studies is based on careful work, but the variances are so large as to deny us any clear answer. They disagree because they measure different periods, define “divided” differently, and draw from small samples. There are only a few dozen years in each category (divided vs. unified), and a handful of extraordinary ones—1929, 1974, and 2008 among them—can tilt an average in either direction. None of those years had much to do with which party held the Senate and more to do with speculative excess, oil shocks, and a banking crisis.
Markets are a dynamic system. Earnings, interest rates, valuations, technology, and geopolitical events no one sees coming are all variables that are in constant motion. Isolating the partisan makeup of Congress as the variable that matters means pulling one thread from a very large tapestry and declaring it the pattern. That may fit a media strategy, perhaps, but not necessarily an investing strategy.
The Double Prediction Problem
Suppose an investor wants to act on the election anyway. Let’s consider what that requires to be successful.
First, the investor has to predict the result. Then the investor has to predict how markets will react to it. Both calls must be right, and the odds multiply. An investor who is right 70 percent of the time on each call will be right on both only 49 percent of the time, worse than a coin flip. And there is a third call hidden inside the second: timing. Knowing the direction of a move is largely worthless without knowing when it arrives and how large it will be.
This year makes the point especially clear. If the first prediction looks nearly settled, all of the uncertainty moves to the second, and the second is exactly where the research cannot agree. Knowing the result doesn’t tell you the reaction.
Election night 2016 offers a vivid example. Many forecasters expected a sharp selloff if Donald Trump won. Stock futures fell steeply overnight as the results came in. Then markets rallied instead. Plenty of investors got the first call right and the second call wrong.
The Toll On Every Trade
Even a correct forecast has to clear a toll. Every trade carries friction: the spread between the buying and selling price, the market impact of the trade itself, and, inside actively managed funds, turnover costs that never appear in the expense ratio. Academic research has estimated that these hidden trading costs can rival a fund’s stated fees.
Then comes the tax. Gains on positions held a year or less are taxed as ordinary income, at federal rates as high as 37 percent, compared with a top rate of 20 percent on long-term gains. An investor who trades around an election is, almost by definition, trading short-term. So the forecast has to be right twice, and then right by enough to pay the spread and the IRS, before it adds a dollar to anyone’s wealth.
92 to 8 Are Not Favorable Odds
Professional managers attempt a version of this every day, with research staff, data, and decades of experience. Despite all that effort, the scorecard is unkind. In 2025, 79 percent of actively managed large-cap U.S. stock funds trailed the S&P 500. Over the past 20 years, roughly 92 percent of domestic funds fell short of their benchmarks. It might be informative to stop right here and ask yourself if an 8 percent likelihood over a huge percentage of your investing life is a smart bet.
Investors have noticed. In 2025, more than $380 billion flowed into passive U.S. stock funds, while $386 billion flowed out of actively managed ones. Passive funds now hold more than half of all U.S. fund assets.
The rest of the market is arriving at a conclusion family offices reached long ago: speculation doesn’t pay. But guiding asset allocations is only one piece of what a family office does. The rest is the coordination of taxes, costs, risk, and income across every account, and that is the part most investors still do alone, and, sadly, rarely do well.
This, Too, Shall Pass
A year after the house-divided speech, Lincoln told an audience in Milwaukee about an Eastern monarch who asked his wise men for a sentence that would be true in every situation. They gave him six words: “And this, too, shall pass away.”
The market’s long record is the best evidence for that wisdom. Since 1928, the S&P 500 has produced a positive return in about 73 percent of one-year periods, 88 percent of five-year periods, and 94 percent of ten-year periods. Every rolling 20-year period in that history has been positive, including those that began on the eve of the 1929 crash and the 2000 peak.
Twenty years is ten Congresses and five presidential terms. An investor who holds on that long lives through divided governments and unified ones, red and blue, gridlock and sweeping legislation. The cycles are real, but they wash out. What remains is the secular record of earnings, innovation and compounding, and it has outlasted every arrangement of power that Washington has thrown at it.
Control the Controllables®
The wealthiest families in the world rarely speculate on elections. They don’t need to know who will control the House, because their plans don’t depend on it. Instead, they concentrate on what can actually be managed.
That is the heart of our Control the Controllables® philosophy: costs, taxes, diversification, and risk are controllables. None of these requires a forecast or a prediction. All of them compound over time, positively if done well, negatively if not. A portfolio built around them doesn’t need the election to go a particular way, or the market to react a particular way, or the timing to be right. And neither do you.
Lincoln’s house did stand, though it took years of hardship and anguish to prove it. Markets have stood through every divided house since. The best preparation for November isn’t a prediction. It’s a plan that doesn’t need one.
If all the noise, conflicting statistics, and endemic uncertainty have you worried about elections or interest rates or any of the other uncontrollables in our world, a Taxes First, Then Math™ Analysis could help. It will pull the focus where it needs to be and give you actionable insights without cost or obligation. You can order yours here.
