September 28, 2022
  • September 28, 2022

Stock market impact of the mid-term elections

By on August 17, 2022 0

The midterm elections in the United States are scheduled to take place on November 8, 2022, and although Biden is not the one on the ballot, the results will strongly shape his ability to pass policies in the second half of his term.

What are mid-terms?

Midterm elections are elections for the House of Representatives that fall in the middle of a presidential term – elections to the House take place every two years, i.e. once in an election year and once mid-term. There are also often votes for Senate seats that fall mid-term, as senators hold office for six years.

The 2022 midterms will see all 435 House seats up for grabs and 35 Senate seats up for grabs as well.

Midterm elections are important because they ultimately influence the current president’s ability to enact policies. Biden is already struggling to pass policies on gun control, climate change and reproductive rights, as Democrats only have a narrow majority in the House and Senate.

They have 221 House seats to Republicans’ 208, with six pending vacancies. The Senate is split 50/50 – but the deciding vote goes to Vice President Kamala Harris, so you can guess which way she votes. For example, the Senate passed landmark legislation on climate change and health care that would see the largest investments in history — the result was evenly split, but Harris cast the deciding vote.

That means if Democrats lose even a few House or Senate seats, we could see Biden’s grip slip even further. The GOP will need five seats to secure a majority in the House and a seat in the Senate. States that could determine whether we see a turnaround are Pennsylvania, Wisconsin, Arizona, Georgia and Florida.

Will the Democrats win the midterm elections?

It remains up in the air whether Biden and the Democrats will win the midterms. But it wouldn’t be unusual for them to lose control of the House.

Midterm elections are often seen as a way for voters to pass judgment on the current government. If they are not satisfied with current policies, the primaries are a good way to express their opinions and divert power from the current party.

For example, the Democrats lost the House in 2010 in the middle of Barack Obama’s presidency, and the Republicans lost the House after two years of Donald Trump’s.

How have stock markets reacted to midterms in the past?

During midterm election years, stock markets are historically weakest. In fact, in more than 100 years, a president’s second year in office has (most often) been the worst for the stock market, according to a report by Ned Davis Research.

Actual declines are not seen every two years, but annualized returns are lower. The Presidential Cycles Report used the Dow Jones to show this:

  • 12.7% for year 1
  • 3.1% for year 2 (the mid-term year)
  • 14.8% for year 3 (pre-election year)
  • 7.4% for year 4 (the election year)

For Biden’s second year, the stock market is already down on tighter financial conditions stemming from the lingering impact of the coronavirus pandemic, soaring inflation and war in Ukraine. In fact, the S&P 500 is down 4.08% year-to-date and the Dow is down more than 7.3%.

If we use Trump’s second year as a comparison, the GOP had just passed a huge package of tax cuts and consumer confidence had reached new heights. But stocks still fell 6.2% mid-term, due to the Fed raising interest rates and growing tensions between the United States and China.

The theory suggests that after yields and volatility decline, the market will rebound at the end of the year and into the year after, with stocks rising in the two quarters following the end of the midterm elections. A study in the Journal of Wealth Management 2019 states:

“…looking at the quarterly total returns of the S&P 500 Index between 1954 and 2017, [the authors] show that nine times out of 10 the index was positive in the fourth quarter of a midterm election year and the following two quarters.

While these patterns exist, it’s important to remember that every year is different. The data above was recorded before the pandemic, so there are a lot of different factors at play now.

This year, we are still likely to see the Federal Reserve attempt to rein in inflation and stave off a recession, which could further undermine investor confidence. Additionally, many US stocks also started the year at fairly high valuations, which caused volatility in their stock prices anyway.

For investors, these market movements can be intimidating but, over the longer term, the impact of intermediaries tends to lessen. But for traders, medium-term volatility creates an interesting environment in which to go both long and short on US stocks and indices.

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What will happen to the stock markets if the Republicans take Congress?

If Republicans take over Congress in the next midterms, Biden will likely lose any chance of pushing policies through, but U.S. stocks could actually gain traction.

According to historical data, beginning in 1901, a Democratic president combined with Republican control of both houses of Congress produced real annualized stock market returns of 8% for the Dow Jones. The average return on the S&P 500 over the years when Democrats have held the presidency and both houses of Congress is 10.5%, compared to returns of 13.6% during a divided Congress.




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SSource: Forbes and CFRA Research, based on S&P 500 data from 1944 to 2021

For example, when Barack Obama faced a divided Congress from 2010 to 2014 — with the GOP holding the House and the Democrats the Senate — the S&P 500 jumped almost 70%.

The idea of ​​a split cCngress being a good thing is somewhat surprising, given that we generally think markets love certainty and strong governments. But since it will be harder for Biden to raise the federal minimum wage and raise corporate taxes, it’s no surprise that a divided Congress could benefit investors.

However, it would also lead to lower government spending, which markets have benefited from over the past year. Biden has passed bills aimed at boosting the national economy and industries, such as:

  • A $1.2 trillion infrastructure bill, which helped push the S&P 500 up 26% in 12 months
  • A $52.7 billion CHIP bill that will aim to boost the domestic semiconductor manufacturing industry – iShares Semiconductor ETF rose 4.66% in the week following the announcement

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