The final outcome of the U.S. mid-term elections remains unclear at the time of my writing, almost two days after the polls closed, with the control of Congress still hanging in the balance. With results still underway, U.S. President Joe Biden has hailed the election as a “good day for the US democracy.” Meanwhile, the Republicans are marching towards the 218-seat majority in the “House of Representatives.”
The House of Representatives
The House is inching towards the Republicans, per projections from most global media in the U.S.. The Republicans have so far secured 211 seats, and the Democrats at 193 seats in the House. A total of 218 seats is needed to gain a majority which has 435 members in the House of Representatives.
The Senate
The control of the Senate remains mixed, with the Democrats having secured 48 seats and the Republicans winning 49 seats so far. The results for three states- Arizona, Nevada and Georgia are yet to come which will be the deciding states.
U.S. Mid-Term elections and its impact on markets
As the outcome of the mid-term elections is underway, let’s look at how the markets have performed in the past during the election period. In the last 90 years, the S&P 500 has generated a median return of 3% through year-end and 17% during the 12 months following mid-term elections, as per data from Goldman Sachs analysts. Additionally, equity returns have been stronger under divided governments.
Markets do not like uncertainty. Usually, we see higher volatility in the lead-up to elections. Nevertheless, the election outcome is likely to provide the clarity, which allows volatility to settle down and markets to go up. Looking at the past, we have normally seen higher volatility and lower returns during the lead-up to elections. Since 1942, the median equity market returns during the first three-quarters of the midterm election years were -1%, 2% and 5%, as per data from JP Morgan reports.
Divided government does not hurt the economy or markets
Source: JP Morgan Analysis, 2022
The U.S. Presidential election cycle and market behaviour
There has been a historical pattern to market behaviour during the 4-year Presidential election cycle:
- The mid-term cycle has been the toughest on stocks
- Historically markets have seen a start of the rally at the end of the Mid Term Cycle.
- Pre-election and Election cycles have been the best for stocks.
Source: Allstar Charts, Nov 2022
Policies have more impact on markets than politics
In the current economic environment, we see other macroeconomic indicators like interest rates and inflation and government policies being more impactful on markets. Wallstreet is seen rallying significantly on Thursday’s trade as October CPI numbers came in at 7.7% for October which has been its lowest annual increase since January and lower from 8.2% from the prior month. To conclude, it’s the policies and the economy which are playing out in markets, not politics that has a bigger impact. Investors need not panic about the divided political government as the U.S. economy has grown at a 2.7% pace on an average and the average market returns have been 7.9% since the World War II.
