- The S&P 500 historically rebounded after the midterm elections.
- Stocks particularly appreciate if the midterm elections result in a divided government.
- But some warn that nothing about this year’s economy has been typical.
“It’s the economy, stupid,” became the governor at the time. Bill Clinton’s slogan in 1992, while campaigning against President George H. Bush. He was right then and he’s still right as the economy tops the minds of voters in this year’s midterm elections.
But what medium-term outcome do investors think can help the economy and boost the S&P 500? Turns out the answer to that may be a dead end.
On November 8, all 435 seats in the US House of Representatives will be up for grabs as well as 35 seats in the Senate. Democrats control the House by 8 seats (220 to 212 with three vacancies). The US Senate has 50 Republicans, 48 Democrats, two independents who often vote with Democrats, and Vice President Kamala Harris, a Democrat, as the deciding vote.
Most economists and pollsters expect Republicans to regain control of the House, but the Senate remains a draw. If the Republicans win control of a single body of Congress, this should prevent significant policy changes for the next two years, they say.
And that political stalemate has “historically benefited equity investors, with the S&P 500 index posting average annual gains in the range of 13.0%,” John Lynch, chief investment officer of Comerica Wealth Management, wrote in a report. . “Although counterintuitive, stock markets tend to prefer a divided government.”
The S&P 500 is considered a barometer of overall stock market performance as it includes 500 of the largest US companies across all industries.
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What do midterm elections mean?
The midterm elections are often seen as a referendum on the incumbent president and the economy, which have recently seen approval ratings close to 40%, according to Reuters/Ipsos monitoring.
As voters head to the polls, they may recall that the economy started strong in 2021 when President Joe Biden took office, benefiting from COVID-19 vaccines that allowed economies to reopen more fully and spurred by the quickly approved US Bailout Act and accelerating the economy.
Since then, the economy has deteriorated. Wage bill growth is slowing and, in particular, inflation has reached its highest level in a generation. Major stock indexes fell into bear markets, or at least 20% below their highs, and the Federal Reserve began aggressively raising interest rates in an attempt to keep inflation under control. Meanwhile, low-energy fuel stocks have warned analysts of higher winter heating bills.
This dive in the economy is why experts predict a strong performance for Republican candidates in November.
What does history tell us about midterm elections and the stock market?
Most data point to a recovery in the S&P 500 after the midterm elections.
- Since 1950, the average return on the S&P 500 in the 12 months following a midterm election has been 15%, surprisingly with no down years, Lynch says.
- In 17 of 19 midterms since 1946, stocks have performed better in the six months after the election than in the six months before, said Liz Ann Sonders, Schwab’s chief investment strategist.
- And if this year’s outcome is as expected with a Democratic president and either a divided Congress or a Republican sweep of both chambers, equity investors should benefit, with the S&P 500 posting average annual gains in the region of 13 .0%, he said.
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Does that mean you can bet on a stock market rally after the election?
No.
This year’s market performance has already diverged significantly from the average midterm election year, Sonders noted.
“Post-election outperformance is often driven by market expectation of increased government spending from a new Congress,” she said. “But an additional injection of funds seems unlikely this year, given historic levels of government spending and stimulus in response to the pandemic.”
Some economists credit massive government spending over the past two years as contributing to 40-year high inflation, and any new spending could make it worse.
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“The combination of high inflation, the war in Ukraine and a lingering pandemic has already made this cycle different from previous midterm years,” she said. “With so many other forces at play in the market, I wouldn’t place much emphasis on historic mid-term performance.”
However, what we can expect more of, says Lynch, is volatility.
What should investors be aware of for stock market direction?
The bottom line: inflation and Fed policy.
“Despite the current headlines surrounding the election and fiscal policy, we expect markets to continue to focus on monetary policy as the Federal Reserve raises interest rates to beat inflation,” Lynch said. .
With annual inflation still so high at 8.2% in September, he expects the Fed to work to bring it closer to its target of around 2% at the expense of jobs and growth. short-term economy.
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Can Democrats win the Senate and House?
James Knightley, ING’s chief international economist, pegs those odds at 10% and is bad for equities.
“Markets would view this as the result of weaker growth and increased political interference, which would tend to pose downside risk to equity markets,” he said.
“The administration would have more power to deal with a recession with a fiscal response,” Knightley said. “That would potentially make it more difficult for the Fed to bring inflation down to 2%.”
If Democrats retain the Senate, Lynch said investments in infrastructure, hospitals and Medicaid HMOs, clean energy, utilities and municipal bonds could benefit.
If Republicans sweep Congress, energy, defense, pharmaceuticals and biotechnology would be positioned favorably, he said.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.
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