End of Midterms Could Usher in a Friendly Stock Market
Markets generally are positive in the months after the midterm elections, irrespective of which party is in power or which one prevails.
This rally came amid a bear market, a looming recession and the highest interest rates in 40 years. Markets are often forecasters of economic times ahead, suggesting the collective wisdom of stock traders is at odds with economic forecasters. This means that major legislative packages aimed at higher taxes for individuals or corporations, for example, would likely be off the table for at least the next two years.”
With a Congress divided, that would leave the Fed as the only player in town if some kind of fiscal assistance were needed to calm markets.
There are other consequences and one of them is that the end of an election cycle – which will come sometime a week from now when the votes are finally tallied – brings an end to uncertainty. And history suggests that is beneficial to financial markets . Markets generally are positive in the months after the midterm elections, irrespective of which party is in power or which one prevails. This year, the polls are razor tight, and the outcome of which party controls the Congress may not be clear for a few days after Nov. 8.Based on polling and predictions, the highest probability outcome at this point would appear to be a split, with Republicans gaining the House of Representatives and Democrats narrowly keeping the Senate. In either case, President Joe Biden would still be in the White House until 2025.And, right on cue, after a down spell in September, the markets recovered in October. The Dow Jones Industrial Average posted a 14% gain, its best performance since 1976, and the broader S&P 500 index rose 8%. Even the tech-dominant Nasdaq saw a 3.9% rise despite the third-quarter earnings of some notable tech names coming in below par.This rally came amid a bear market, a looming recession and the highest interest rates in 40 years. Markets are often forecasters of economic times ahead, suggesting the collective wisdom of stock traders is at odds with economic forecasters .But when it comes to the economy and economic policy , the outcome of the election will matter. The first two years of the Biden presidency have been characterized by aggressive fiscal stimulus , with the COVID-19 package passed in its early days and an infrastructure bill along with legislation aimed to improve America’s semiconductor industry. At the same time, the Federal Reserve plied the economy with cheap money only to abruptly slam the brakes on in March as inflation roared.Now, the likelihood of much more economic policy , or stimulus, will be slight no matter the election outcome. And if the Republicans take back the House or the Senate, or even both, that is unlikely to change.Should the Democrats prevail and keep control of Congress , don’t look for a blizzard of progressive policymaking. With inflation still well above the Fed’s preferred target of 2% annually, there is little appetite in Washington or on Wall Street for fiscal stimulus . The example of former Prime Minister Liz Truss’ demise, brought on by a U.K. bond market traumatized by her plans for an upper-income tax cut, will not be lost on politicians in the U.S.“A divided government – in a way – epitomizes the checks and balances system,” Ian Schaeffer, global investment strategist at J.P. Morgan’s private banking unit, wrote in a note to clients last week. “A divided government would not be likely to pass any legislation that falls too far from the center of the political spectrum. This means that major legislative packages aimed at higher taxes for individuals or corporations, for example, would likely be off the table for at least the next two years.”With a Congress divided, that would leave the Fed as the only player in town if some kind of fiscal assistance were needed to calm markets . But even the Fed is chastened now following its 2021 miscue in branding inflation “transitory.”The Republicans have been successful throughout the election campaign with tarring the Democrats as the party of inflation. Should they take control of the House, one can expect hearings on economic policy as well as investigative oversight of regulatory agencies such as the Securities and Exchange Commission. Expect talk of “woke” capitalism and other pet peeves of conservatives.
