A big night for Republicans on Tuesday could fuel a short-term rise in stocks and help keep alive what will likely be another bearish rally, according to a Wall Street analyst who correctly labeled this year’s stock selloff.
Mike Wilson, Morgan Stanley’s chief equity strategist, remains long-term bearish for stocks, but has an upside target in the 4,000-4,150 range for the S&P 500 SPX,
which has rebounded from setting a 2022 closing low at 3,577.03 on Oct. 12. The index was up 0.9%, trading near 3,805 late Monday afternoon after stocks fell last week. The Dow Jones Industrial Average DJIA,
increased by nearly 430 points, or 1.3%.
Wilson said a continued decline in bond market volatility and a pullback in longer-term Treasury yields could serve as catalyst for a test of the bank’s upside targets, although the rally itself is not likely to persist.
As for longer-term returns, the midterm elections could “provide a potential catalyst … if Republicans win decisive control of the House and Senate, as some polls and betting markets suggest,” he said. wrote Wilson. “Because it is
purely a tactical business view and not in line with our core fundamental view, which
remains bearish, we will remain disciplined on how much leash to give it.
Midterm elections will determine control of Congress. Democrats currently hold a narrow majority in the House and control the Senate 50-50 thanks to Vice President Kamala Harris’ decisive vote. Polls indicate that Republicans are likely to take control of the House and could also take control of the Senate.
In a chart: Republican lawmakers likely to target ‘woke capitalism’ after midterm elections, analysts say
A Republican takeover of at least one house of Congress is seen as a potential upside for long-term Treasuries, potentially driving down yields, which move in the opposite direction of price. That’s because Republicans would “likely throw a wrench in the aggressive fiscal spending plans that Democrats would still like to see done,” Wilson wrote.
Republican control of either chamber could also reignite a battle over the debt ceiling.
See: Violating the US debt ceiling would be a ‘disaster’ for Americans, expert says, as potential showdown looms if Republicans win midterm
More broadly, analysts have been looking to stocks for a seasonal boost once voters head to the polls.
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“Historically, markets have done well in the year since the mid-terms. In fact, they’ve been higher 18 out of 18 times the following year since 1950, with nearly identical historic returns under Democratic and Republican presidents,” LPL strategists Barry Gilbert and Jeffrey Buchbinder wrote in a Monday note (see below).
“It’s not a guarantee that it will happen this time, of course, and remember that the S&P 500 has been higher by about 80% of all the years during this period, so 18 out of 18 n is only slightly above expectations,” they warned.
They noted that going back to 1951, a Democratic president with a Republican or split Congress — the two most likely outcomes of that election — saw an average S&P 500 index return of more than 17%, compared to an average overall just over 12%. A divided Congress with a Republican president also saw strong returns.
The exception to a pro-equity mixed government, they said, has been the combination of a Republican president and a Democratic Congress, as was the case for most of the Eisenhower administration, as well as under Richard Nixon and Gerald Ford. It’s not a potential combination that voters and investors are currently facing.
There are several possible fundamental reasons for the strength of the market after the midterm elections, the analysts wrote. The main thing is that the uncertainty associated with the election is over. Additionally, midterm elections usually provide some sort of course correction from presidential elections, as the party that controls the White House usually loses ground and markets can price in prospects for a better balance. politics ahead, whoever is in the Oval Office, they said.
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