Midterm elections in USA: What effects will they have on the markets?
Less than six months remain until the midterm elections, and it is unlikely that Democrats will maintain their congressional majority. The Senate is evenly divided, and the Democrats hold a five-seat advantage in the House of Representatives. 35 Senate seats are up for election in the 2017 midterm elections, 21 of which are currently held by Republicans and 14 by Democrats. The 2020 Census will result in reapportionment and redistricting, which should favour the Republicans since all 435 House seats are available for election.
In addition to having a very slim majority in Congress, the Democrats also do not have the benefit of historical precedent. Since World War II, the president’s party has lost members in the House in 17 of the 19 midterm elections and the Senate in 13 of the 19, losing an average of 27 seats in the House and three to four seats in the Senate. Additionally, the president’s approval ratings are low, and midterm elections frequently serve as a referendum on the incumbent administration. Divided governance appears to be the most likely result as a result.
In the end, policy, not politics, has the greatest influence on the market and the economy. Even though there have been recently revived negotiations about a scaled-back version of Build Back Better, it is unlikely that large expenditure or tax hikes would be approved before the November elections. Due to the limited opportunities for bipartisan consensus after the midterm elections, a split government is likely to result in political inaction.
Midterm elections in USA: What effects will they have on the markets?
The debt ceiling won’t be a problem until 2024, according to recently improved budget estimates, but a conflict that results in a shutdown of the government is very likely in the new Congress. Divided government is not a cause for concern for investors, though, as it is the most frequent form of governance. Since World War II, the economy has risen at an annual rate of 2.7%, while market returns have been 7.9%.
This emphasises a crucial message for investors: Don’t allow your opinions on politics dictate how you approach investment. Despite the fact that voters had very strong impressions of the two presidents before Trump, average yearly stock market returns throughout his and Obama’s administrations were quite similar at 16.0% and 16.3%, respectively, and far higher than the 10.6% average over the previous 30 years. Investors who let their political beliefs override their financial judgement may have missed out on above-average gains during political administrations they disapproved of.
In the run-up to elections, volatility is often higher and returns are lower because markets dislike uncertainty. Election results, on the other hand, offer the clarity that enables volatility to subside and markets to stabilise. Since 1942, the first three quarters of midterm election years have had median equity market returns of -1%, 2%, and 5%, respectively, but the fourth quarter has seen median equities market returns leap to 8%. In conclusion, historical evidence indicates that investors shouldn’t let political inclination or political ambiguity influence their investing choices.
