Midterm Elections and the Markets

It’s been a rocky road for the stock market so far in October.  Historically, the financial markets aren’t jittery around mid-term elections.  But rising interest rates, a trade war, the mysterious death of an Arab journalist, and Central Americans on the march toward the U.S. border all make for political drama.

Recall back in the 2016 presidential election.  Trump’s win shocked investors and sent markets into a tailspin through the night and into the pre-dawn hours of Wednesday.  At 1:40 a.m. ET, shortly after the AP called for Trump to win Pennsylvania in a move that all but sealed his election, stocks were off their worst levels with the Dow futures down 660 points, or 3.6 percent, S&P 500 futures were down about 91 points, or 4.3 percent, and Nasdaq futures were down 229 points, or 4.8 percent.

But soon after, markets roared – up more than 6 percent before Inauguration Day.

But what about mid-term election years?  Binky Chadha, chief strategist at Deutsche Bank, noted that the three-month period running from a month ahead to two months after an election has produced a median 8 percent gain. This period includes the last 21 mid-term elections over the past 80 years. He suspects, however, that this performance has more to do with the coincidence of traditional drivers, such as growth and earnings.

But others on Wall Street think this time it’s different. Goldman Sachs’ chief equity strategist David Kostin, in a research note, wrote “the unusual current political environment makes typical market patterns around mid-term elections less reliable than might otherwise be the case.”

Indeed, the policy implications of this election could be significant.  Niladri Mukherjee, chief investment officer at Merrill Lynch, said that the “…shifts in the balance of power in Washington could have meaningful implications for fiscal policy and foreign relations.” The president’s party has historically not done well during midterm elections, and the results could affect “pro-growth measures such as the so-called Tax Reform 2.0, which could include making individual tax cuts permanent and create new incentives for retirement savings and research and development,” said Mukherjee.

Goldman economists predict that if the Democrats take back the house, “health care policy would be the primary focus of the incoming 116th Congress.” On the other hand, a divided Congress would be good for aerospace and defense stocks, as a deal imposing fiscal constraint would be unlikely, the Goldman analysts argue.

Still others argue that Democratic majorities could mean more confrontation, including government shutdowns, investigations, and even the threat of impeachment, which could jar the markets.

Whatever the outcome, in times like these, it often pays to take shelter in the wisdom of great investors like Warren Buffet, who said, “It’s never paid to bet against America. We come through things, but it’s not always a smooth ride.”

Rowena Itchon is senior vice president at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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