How midterm elections will affect the stock market

With the country already in a recession, by definition, and inflation continuing to rock the budgets of American families, the outcome of next week’s midterm elections will have a direct effect on the stock market and the economy as a whole.

Next Tuesday — eight days from today — 435 House seats, 35 Senate seats and 36 gubernatorial seats will be decided upon by voters who are already on edge over the economy.

“Regardless of who holds onto or gains power from the midterm election, the result will affect investors and the stock market for weeks to come. Moreover, the rising cost of living and persistent inflation may accelerate depending on the volatility of the stock market’s reaction,” Fox Business reported.

The network noted that in seventeen of the last nineteen midterms, the stock market has always outperformed six months from an election, adding that the markets generally “do not react well to surprises or uncertainty. Stocks generally fluctuate before, during and after Election Day. Although, rebounds typically occur, too much volatility may make that much more difficult.”

And markets are always volatile after elections. Here is the historical effect midterm elections have had on the market, according to Fox Business:

Historically, an incumbent president’s political party has lost seats 13 times in the House and nine times in the Senate over the last six decades in 15 midterm elections, according to CNC Financial Group. Historically, the market has mostly underperformed in the year leading up to the midterm, which would be consistent with the current economic situation in the U.S. Moreover, stocks also outperform 12 months after the midterm with an S&P 500 average of 16.3%, according to Bloomberg.

In the most recent 2018 midterm, the stock market rallied quickly after the Democrats took back the House while Republicans maintained a majority in the Senate. The Dow Jones Industrial Average climbed by over 250 points the day after the election, which totaled to a 1% increase, while the S&P 500 and Nasdaq also increased by over 1%. Typically, whether a party gains or maintains control of government is the most significant indicator of how well the market will perform.

 

Given the poor performance of today’s market and concerns about a full-fledged recession, the likelihood of the market outperforming again is not as certain.

“Post-election outperformance is often driven by the market’s expectation of increased government spending from a new Congress,” Liz Ann Sonders, Schwab’s chief investment strategist, said in a statement, according to Fox Business. “But an additional infusion of funds seems unlikely this year, given the government’s historic levels of spending and stimulus in response to the pandemic.”

“The combination of high inflation, the war in Ukraine and a lingering pandemic has already made this cycle unlike prior midterm years,” Sonders added. “With so many other forces at play in the market, I wouldn’t put much weight in historical midterm-year performance.”

The article said government spending is a contributor — perhaps the key contributor — to today’s inflation and more spending is sure to exacerbate the problem.

History is on the side of Republicans, with an incumbent president’s political party losing seats in the House or Senate in a majority of the last 15 midterm elections. At the same time, should the GOP take control of the House and the nation’s purse strings, as widely expected, there’s no guarantee that they will spend any less — recent history proves as much.

Should they control both chambers of Congress, their ability to force President Joe Biden to open up the energy market increases, which should deliver much-needed relief to Americans in lower fuel prices and provide a boost to the economy.

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