How Will the Market Respond to Mid-Term Election Results?

IT DEPENDS ON WHO TAKES THE SEATS.

Mid-term elections are fast approaching, and how they’ll shake out is currently anyone’s guess. All 435 seats of the US House of Representatives are up for grabs, as well as 35 of 100 seats in the Senate.1 On November 6, voters will also cast their ballot for 36 gubernatorial elections.2

Historically, mid-terms have shown lower turnouts than presidential elections, but the current political climate could push this year’s number of voters upwards. In the 2014 elections, Republicans gained control of both houses of Congress, but it remains to be seen if Republicans will retain control or if Democrats will flip the balance in their favor in either the House or the Senate.

If Democrats take control of both sides of the legislature, it is likely significant changes could be made. A Democrat majority will probably shift focus to health care sector, as well as policies related to alternative energy.3 Impeachment proceedings are a possibility, but the first order of business would probably be a return to many of the policies from the previous administration, as well as an end to the current trade war. While an impeachment would unsettle the market temporarily, these outcomes aren’t likely to rattle the markets significantly.

However, if Republicans keep control of Congress, we will most likely see more tax cuts, stronger policies regarding immigration and trade, and possibly a continuation of the bull market. A Republican majority will continue to support efforts in the sectors including consumer discretionary, financials and industrials.4

While we cannot predict either which party will gain (or retain) government control, history does give us an idea of what to expect from the markets and the economy. Past economic and market results are split when it comes to party control. The S&P 500 Price Index shows that average annual returns are higher when Republicans are in control; since 1947, the index reports a 14.4 percent average annual return under a Republican-led government, while the average annual return under the Democrats is 9.2 percent. In a divided government, average annual returns are lower at 5.7 percent.

However, average gross domestic product (GDP) numbers are higher in a Democrat-controlled government, with average GDP growth at 4.4 percent with the Democrats in charge and 2.8 percent under Republicans. A divided government has also seen average GDP growth of 2.8 percent.One important item of note is that US markets have not experienced a negative fourth quarter in a midterm election year since 1945. Instead, the fourth quarter gain in those years has been 7.5%, more than twice the average of 2.9% in other years.6

No matter the results, some market analysists predict gridlock. No matter which party takes the majority, we could still see heavy party infighting, the result of a wide range of ideologies within the parties. This is actually good news for the market. When parties work together, they are more effective at creating change – and Wall Street doesn’t like change.

 

 

  1. Leia Klingel. Fox Business. May 8, 2018. “Midterm elections and stocks: How to gain no matter who wins. https://www.foxbusiness.com/markets/midterm-elections-and-stocks-how-to-gain-no-matter-who-wins Accessed October 18, 2018.
  2. 270 to Win. “2018 Gubernatorial Elections Map.” https://www.270towin.com/2018-governor-election/ Accessed October 19, 2018.
  3. Leia Klingel. Fox Business. May 8, 2018. “Midterm elections and stocks: How to gain no matter who wins. https://www.foxbusiness.com/markets/midterm-elections-and-stocks-how-to-gain-no-matter-who-wins Accessed October 18, 2018.
  4. Ibid.
  5. JP Morgan Chart.
  6. William Watts. MarketWatch. October 1, 2018. “Investors banking on a stock market rally after midterms should take a look at this chart.” https://www.marketwatch.com/story/did-the-stock-market-already-get-its-midterm-election-bump-2018-09-27 Accessed October 24, 2018.

 

Investments involve risk including the potential loss of principal invested. Past performance is not indicative of future results. The information contained herein provided by third parties has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.  This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the needs of an individual’s situation.

 

636679 For financial professional use only.

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