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Market Impact of Midterm Elections

Politics is the art of the possible. With the recent midterm elections, the scope of what’s possible has been narrowed. Any impact the new Congress may have on the markets may turn on how the Republicans in the House choose to wield their newfound power.

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    Market Impact of Midterm Elections

    Market Impact of Midterm Elections

    Politics is the art of the possible. With the recent midterm elections, the scope of what’s possible has been narrowed. While the “red tsunami” turned into a “red ripple” (will pollsters ever get it right?!), the Republicans did manage to gain control of the House—and the implications to the economy and business is uncertain.

    A Historical Overview of Markets Post the Midterm Elections

    Since 1962, the average seat change for the president’s party in a midterm election is 23 lost seats in the House and three in the Senate. The stock market has generally reacted well to such results; in the 12 months prior to the midterm election, the average stock market return was -1.0% owing to the uncertainty these elections hold, but up by an average of 16.3% in the 12 months that followed.1

    What It Means for the Market

    The outsized performance in the year following midterm elections is weakly correlated to the political party sitting in the White House, suggesting that divided government may be the market’s fondest wish.

    Any impact the new Congress may have on the markets may turn on how the Republicans in the House choose to wield their newfound power. They can choose to work with Democrats to forge compromises on important challenges facing the economy and businesses—such as immigration, spending, student loan forgiveness and regulation—or they can decide to become confrontational with investigations and fights on issues like raising the debt ceiling.

    While political gridlock may be the consensus view for the next two years, there are areas of potential alignment between the two parties. For instance, there appears to be bipartisan support for greater regulation on Big Tech and crypto markets. Additionally, higher defense spending also seems likely, though that may depend upon finding agreement on spending cuts amid a more limited fiscal environment.

    The momentum to delist U.S.-listed Chinese stocks that don’t comply with U.S. audit standards may increase in view of growing U.S.-China tensions, holding implications for the value of these names.

    The threat of higher taxes on businesses may recede, as a Republican House is unlikely to support new taxes, especially President Biden’s recently proposed windfall profits tax.

    The shift toward more restrictive regulations on competition, including antitrust actions and greater disclosure requirements from the SEC, may continue swiftly since the regulatory agencies have wide latitude to act without Congressional interference.

    Finally, with the sharp political divide at state levels, businesses will remain challenged to respond to conflicting dictates on social issues from red and blue states.

    Sources:

    https://www.usbank.com/investing/financial-perspectives/market-news/stock-market-performance-after-midterm-elections.html

    Please reference disclosures: https://blog.americanportfolios.com/disclosures/

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