Market Update 07/11/2022 — US Mid-Term Election &The Market
The United States mid-term elections are an ongoing set of elections that are scheduled for November 8, 2022. The election potentially could reshape the landscape of national politics in the country. The changes will be more notable, especially if they result in control of the House of Representatives shifting from Democrat to Republican.
As of Sunday morning, November 6, 2022 more than 40 million ballots had been cast nationwide. All 435 members in the House of Representatives are up for election (currently 220 Democrats, 212 Republicans, three vacant). The mid-term election is a two-year term.
The presidency is not up for election until 2024. However, the outcome of the mid-terms could determine whether Biden stands again and whether former president Trump will seek the Republican nomination to run.
Nonetheless, the most important issue is the state of the economy.
According to the poll by Gallup, 46% of Americans voted for economic issues as the most important factor. The high and keep on rising cost of living, high-interest rates, and falling asset prices all cause concern for the electorate. The current state of the weakening economy is all hurting President Biden and the Democrats. While the second most cited negative factor is ‘The perception of poor performance in government.’
Currently, The Democrats control both the Senate and the House of Representatives by a slim majorityand losing either of the chambers will significantly reduce their power to effectively enact most legislation in the next two years.
The mid-term elections are typically seen as a referendum on the effectiveness of a president and their party during the first two years of their term. It will be seen as the first nationwide referendum on the president’s performance. Historically, the president’s party tends to fare poorly and lose ground during mid-terms due to voters’ frustration with current issues.
“Right now, it seems like voters are more focused on inflation, economy, immigration, and crime – issues that favor the Republicans. They are not as focused on issues that favour Democrats like … health care and gun control,” — said Mr. Steven Okun, senior advisor of consultancy firm McLarty Associates.
A Split Government
Republicans have been leading in polls and many analysts believe the likely result will be a split government, with GOP control of the House of Representatives and possibly the Senate for the second half of Democratic President Joe Biden’s term.
“A split government would be good because nothing would get done, and we’ll get no more uncertainty for the next two years,” said Kim Forrest, chief investment officer at Bokeh Capital Partners.
Businesses can operate when they know what the playing field is, and if Republicans control Congress amid a Democratic president, that will bring US companies some certainty. Energy and financial stocks will perform well in a divided government.
However, a surprise win by Democrats could fuel concerns about more fiscal spending and inflation. That would be highly problematic in this inflationary environment.
“If the Dems were to retain full control of Congress, you’re more likely to see fiscal expenditures rise and that would be highly problematic in this inflationary environment,” said Spenser Lerner, a portfolio manager at Harbor Capital.
History to Repeat with a Post-Election Comeback
The fourth quarter and the next two quarters after mid-term elections have traditionally been the strongest stretch throughout the four-year presidential cycle, delivering common positive factors of 6.6%, 7.4%, and 4.8% respectively for the S&P 500 since 1950.
Another promising precedent: The S&P 500 has barely shown any weak points within the wake of midterm elections previously. In common, it traded greater within the subsequent month, three months, half a year, and full-year after the midterm elections.
The S&P 500 has posted a positive return in the 12 months following all 19 midterm elections since WW II. Similar gains could be in store this time around—as long as inflation numbers are not hotter than investors expect.
Year three of the presidential cycle has been by far the strongest since WW II, pushing the S&P 500 14% greater on common, information compiled by Bespoke Investment Group present. The S&P has gained 57% of the time in year two of the election cycle and 83% of the time in year three.
Options pricing signifies that the S&P 500 would rise as a lot as 0.7% on a Republican win and fall as a lot as 3.3% if the Democrats in some way maintain on to Congress, nearly twice the size of the average daily move the index has recorded this year.
This cycle isn’t an anticipation of what’s coming, but rather a reaction to what’s already happening. The results of the midterm will give greater visibility and help draw investor confidence higher.
Taxes on Businesses
If Republicans get the House, Republicans may be less likely to approve a windfall tax on oil company profits and also are generally not in favor of tax hikes on the wealthy.
Some Sectors Could Get a Boost
A GOP sweep could lead to more spending on defense. The House passed a record-high defense budget proposal this summer.
Biden and Republicans also seem to be on the same page when it comes to boosting spending on infrastructure. That could give a boost to utilities, construction companies, and some real estate stocks.
How the Mid-Terms Election could affect The Wall Street?
Markets do not always react well to surprises or uncertainty. Stocks generally fluctuate before, during, and after Election Day. Even though rebounds typically occur, too much volatility may make the procedure to be much more difficult.
Do stocks tend to go up or down following midterm elections?
“Post-election out performance is often driven by the market’s expectation of increased government spending from a new Congress,” Liz Ann Sonders, Schwab’s chief investment strategist, said in a statement.
Since 1946, in nearly 90%, or 17 of the last 19 midterms, market performance increased six months after the election compared to the months leading up to it. Nevertheless, the possibility of a repetition occurrence may not be as guaranteed for the upcoming election as 2022’s market performance is significantly poorer than prior years.
Generally, there are a few different variables that can affect stock market performance. These are some of the changes observed when looking at the historical record for markets in the aftermath of presidential elections.
After an election, stock market returns tend to be slightly lower for the following year, while bonds tend to outperform slightly after the election. When a new party comes into power, frequently stock market gains averaged 5%. On the other hand, when the same party retains control of the White House, returns were slightly higher, at 6.5%.
“This cycle is different in that we haven’t seen so far more stimulative policy, we’ve seen the opposite,” said Delwiche, an investment strategist at All Star Charts.
He continued, “This cycle isn’t an anticipation of what’s coming, but rather a reaction to what’s already happened. If Republicans win in the midterms, maybe policies would be more markets-friendly, and that could support the S&P.”
How to structure your portfolio to weather election years and the post-election period?
Market increase volatility and uncertainty will cause prices to move widely, but also open the opportunity to buy equities. It is crucial to keep an eye on the sectors that are most likely to be affected by the presidential election (like healthcare). The best rule of thumb may simply be to stay invested and make sure your portfolio is rebalanced when necessary.
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