Market Impact of Midterm Elections

Heading into Midterm Elections

Heading into midterm elections, Democrats hold a nine seat majority over Republicans in the House of Representatives and a 50/50 majority in the Senate. Midterms are often seen as a referendum on the party in power. Since World War II, the president’s party has lost House seats in 17 of 19 midterms and Senate seats in 13 of 17 midterms. President Biden’s approval rating has been hovering around 40% for the last 12 months. This has predictive markets implying a ~90% chance of Republicans winning at least one chamber of Congress, with the most likely scenario being a split between the House and Senate.

Split Government Expectations

With a lack of unity in Congress, a split government would likely stifle legislative spending initiatives created during the Biden administration. During periods of elevated inflation, a political environment that produces less spending would likely be well-received by market participants.

Market Impact

Markets do not take kindly to uncertainty, with higher volatility and weak market performance often preceding elections. Following elections, markets tend to settle with steadier returns. Since 1962, the S&P 500 has averaged a 16.3% return in the 12 months following midterm elections. Remember, markets are less impacted by election outcomes and more impacted by the health of the overall economy.

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