How US Midterm Elections Affect the Stock Market
The 2022 US Midterm Election will influence the legislative agenda of the next Congress, including fiscal policy, taxation and spending — but how will it influence the stock market?
When it comes to partisanship, Wall Street generally prefers a divided government. That’s because the stock market tends to be driven less by what it likes and more by what it doesn’t like — which in this case is uncertainty. A split government would curtail any new measures from the Democratic President and make him somewhat of a lame duck. This means the market can expect that the current fiscal policies will remain in place — no tax cuts and no major spending bills for the next two years.
With many races still too close to call, the results lean towards some form of a split Congress with Republicans narrowly controlling the House while Democrats keep the Senate. The general consensus on Wall Street is that Republican control of the House would be a market-friendly outcome.
If history is any guide, from 1950 to 2021, a Republican congress under a Democrat President has been the most favourable environment for stocks — with the benchmark S&P 500 returning 16.3% annually on average. A split congress, under either Presidential party, also sees an above average annual return for the S&P at 13.6%.
It’s also worth noting that regardless of who wins, the S&P 500 has returned an average of 15% in the 12 months following a midterm election — with no down years. Further, stocks performed better in the six months following the election in 17 of the 19 midterms since WW2.
However, wise investors know that past performance isn’t indicative of future performance. This year’s market performance has already diverged significantly from previous years, and the midterm’s effect on markets may be diluted by more powerful factors like record-high inflation, a hawkish Fed, low energy fuel stockpiles, the war in Ukraine and supply chain pressures. Major stock indices are already in bear market territory.
Additionally, much of the post-election outperformance is driven by the market’s expectation of increased spending from a new Congress, which is unlikely due to the historic levels of spending that happened in response to the Covid-19 pandemic — any additional spending could further exacerbate the 40-year high inflation.
With so many forces at play in the current market, investors should avoid putting too much weight in historical midterm-year performance. For those with a longer-term investment horizon, it matters even less as the market becomes more politically agnostic — no political party substantially impacted long term market returns since WW2. Inflation and Fed policy are the most powerful forces moving the current market as it remains hinged on monetary, rather than fiscal policy.
The information contained in this article is not intended and should not be used or construed as an offer to sell, or a solicitation of any offer to buy, securities of any fund or other investment product in any jurisdiction. The information in this article is not intended and should not be construed as investment, tax, legal, financial or other advice. Past performance is not indicative of future performance.
