The Market’s Midterm Exam

On November 8th, midterm elections will decide the balance of power in Washington for the next two years. When all is said and done, who will control policy making and how might the market react?

• The outcome of midterm elections is determined, in part, by the President’s approval rating. Historically, the approval rating has driven about half of the variation in the number of seats gained/lost in the U.S. House of Representatives.

• During a president’s first term, their party usually loses seats in the House – on average about 23 seats over the past four decades – with one recent exception of George W. Bush after 9/11. In our view, this historical fact plus Biden’s current approval ratings position the Republicans to have a good chance of taking control of the House, especially since they only need to win five seats.

• A divided government usually means less meaningful legislation which reduces uncertainty– typically a good thing for investors. Since 1982, the market has cheered the clarity that follows elections with an average return of 14% for the S&P 500 in the 12 months following mid-term elections. If history is any guide, the market may be comforted once again by the completion of this year’s election.