The investor’s guide to midterm elections

Voting for midterm elections has concluded, but the final results won’t be known for days. Early polling indicates Republicans taking control of the House while Senate control is dependent on a few swing states.

Why do midterm elections matter for markets?

Whether we get a divided government or Republican-controlled one, the results will have a big impact on policy decisions.

• A divided government would make new legislation harder to push through. Less change, less uncertainty.
• Republican control could favor industries like energy, defense, pharmaceutical and biotech.

While Republican control would make it easier to push policies through, Biden still has veto power.

But what matters most is inflation…

Before the midterms, Democrats had control of both the House and Senate. This made it easier for them to implement large spending packages that many argued contributed to high inflation. But that could be changing.

Here’s how different scenarios could impact inflation:

• Democrats retaining control would make it easier for Biden to push the remaining portion of his big spending agenda through. Many see this as being inflationary.
• A Republican “clean sweep” would likely limit the amount of government fiscal spending and reduce high budget deficits, per Morgan Stanley (BBG).

But others don’t believe the outcome will matter much for inflation. Christopher Smart of the Barings Investment Institute thinks that “for the next few years the course of the economy is almost entirely in the hands of the Fed.”

Investors: Past data tells us… 🥁 drumroll 🥁

You’ll like this stat: Since 1950, markets have been higher one year following the election 18 out of 18 times.

Why the strength? Analysts believe midterm elections remove uncertainty in the markets.

Midterm elections might have taken priority at this moment, but Thursday’s October inflation data release could easily send us in a different direction.