US midterm elections take place next week. Will markets respond?
Getting the midterms out of the way is usually greeted with investor relief. Since 1950, notes Schaeffer’s Research, the S&P 500 gained every single time in the six months following midterm elections — 18 out of 18, with stocks averaging gains of 13.89 per cent.
This year’s midterms are likely to favour the Republicans in one or both chambers, says Morgan Stanley, for two main reasons. Firstly, voters typically use the midterms to express their frustrations with the ruling party. Secondly, Democrats are facing a more competitive landscape than Republicans in congressional and senate races.
That would result in political gridlock, with the Democrats holding the presidency but the Republicans holding one or both houses of congress.
Markets usually like gridlock, as it reduces the odds of big policy changes. Still, history may not repeat itself as investors have other things on their mind right now.
A “looming recession”, caution Blackrock analysts, will likely outweigh any potential positives from the election outcome.