Can Midterm Elections Move Markets?

October 27, 2022

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The buzz surrounding the U.S. midterm elections has picked up recently as experts suggest the Republican Party may not win back the House of Representatives in a “red wave” widely expected just a few months ago.  With that being said, my expectation is that the GOP will win the House in next months election.  The Senate, meanwhile, remains a toss-up that could go either way as races tighten in a number of key states.  Please understand that these comments are analysis and not advocacy.

If I am correct about the outcome of the November 8 elections, a Republican victory will mark the end of the affirmative phase of Biden’s presidency. From an investment point of view, flipping the House is really all that matters. With Republicans holding the purse strings, there would be no chance of passing ambitious legislation related to taxes, climate change or labor policy until at least 2025.

At the moment, Biden’s low approval rating is a bad sign of the upcoming election.  It’s ticked up from 38% in polling averages to the low 40s. If he rises to the high 40s or 50%, that might make a difference. The low 40s is a very bad place to be going into a midterm election. As other analysts have noted, this is roughly where Ronald Reagan, Bill Clinton, Barack Obama and Trump were at the same point in their presidencies. They lost 26, 52, 63 and 40 House seats in their first midterms, respectively.  As you can see in this graph, the party in power usually loses House seats in the midterm elections.

With that being said, going back to 1933, markets have averaged double-digit returns in all years that a single party controlled the White House and both chambers of Congress. This is just below the average gains in years with a split Congress, a scenario which many believe is a strong possibility this year. Even the “least good” outcome — when the president’s opposing party controls Congress — notched a solid 7.4% average price return.

Midterm elections — and politics as a whole — generate a lot of noise and uncertainty.  Even if elections spur higher volatility there is no need to fear them. The reality is that long-term equity returns come from the value of individual companies over time. Smart investors would be wise to look past the short-term highs and lows and maintain a long-term focus.


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