Here’s how the midterms will affect the stock market

In the coming days, voters across the country will decide which party controls the legislative branch of government and several gubernatorial seats.

Regardless of who holds or gains power in the midterm elections, the outcome will affect investors and the stock market for weeks to come. In addition, the rising cost of living and persistent inflation could accelerate depending on the volatility of the stock market reaction.

On Nov. 8, midterm elections will give voters 35 Senate seats, 435 House seats and 36 gubernatorial seats.

Rising interest rates are also putting Americans on edge as fears of a recession continue to grow. However, historically, markets have always become volatile, whether better or worse, after an election, but the current vulnerability of the US economy can produce long-term effects.

A SIMPLE GUIDE TO THE MID-TERM ELECTIONS, HOW THEY AFFECT THE PRESIDENCY AND MORE

Over the past few weeks, the world’s most powerful CEOs have expressed concern about the current state of the economy and that continuing high interest rates will push the country into recession. Amazon’s Jeff Bezos, Tesla CEO Elon Musk, Goldman Sachs CEO David Solomon, and JPMorgan CEO Jamie Dimon are among the most prominent of these businessmen giving this warning.

“These are very, very serious things that I think are likely to push the United States and the world – I mean, Europe is already in recession – and they are likely to put the United States in a kind of a recession six to nine months from now,” Dimon said in an interview earlier this month. Dimon also warned that the S&P 500 could fall as much as 20% in the coming month.

In general, markets react poorly to surprises or uncertainty. Stocks typically fluctuate before, during and after Election Day. Although bounces usually happen, too much volatility can make it much more difficult.

By definition, the United States is already in a recession. The most widely used definition of a recession is two consecutive quarters of declining gross domestic product. US GDP fell at an annualized rate of 0.9% in the second quarter, following a 1.6% decline in the first quarter of 2022. However, since the 1929 midterm elections, a recession has not started during a president’s third year in office. To get a rough idea of ​​how the election results will affect the stock market, we need to evaluate past midterm elections.

How has the market been affected historically by the midterms?

Historically, an incumbent president’s political party has lost House seats 13 times and Senate seats nine times over the past six decades in 15 midterm elections, according to CNC Financial Group. Historically, the market has mostly underperformed in the year leading up to the medium term, which would be consistent with the current economic situation in the United States. Additionally, stocks are also outperforming 12 months past the mid-term with an S&P 500 average of 16.3%, according to Bloomberg. .

In the last half of 2018, the stock market rallied quickly after Democrats retook the House while Republicans retained a majority in the Senate. The Dow Jones Industrial Average climbed more than 250 points the day after the election, which totaled a 1% increase, while the S&P 500 and Nasdaq also rose more than 1%. Generally, whether a party obtains or retains control of the government is the most significant indicator of market performance.

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For example, election results from the years Donald Trump and Joe Biden claimed the presidency were followed by an S&P 500 total return of nearly 24% in 2016 and 40% in 2020. Factors beyond the control of party affiliation will determine how the market will develop. react.

Do stocks tend to go up or down after the midterm elections?

Since 1946, in almost 90%, or 17 of the last 19 midterms, market performance has increased six months after the election compared to the months before it. However, the same results may not be as guaranteed for the next election, as market performance in 2022 is significantly lower than in previous years, according to Charles Schwab.

“Post-election outperformance is often driven by market expectation of increased government spending from a new Congress,” Liz Ann Sonders, Schwab’s chief investment strategist, said in a statement. “But an additional injection of funds seems unlikely this year, given historic levels of government spending and stimulus in response to the pandemic.”

In fact, all that money is contributing to the 40-year high in inflation, and any new spending would likely exacerbate the problem.

“The combination of high inflation, the war in Ukraine and a lingering pandemic has already made this cycle different from previous years at the midpoint,” Sonders added. “With so many other forces at play in the market, I wouldn’t place much emphasis on historic mid-term performance.”

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Is the stock market closed on polling day?

The New York Stock Exchange is open Monday through Friday from 9:30 a.m. to 4 p.m. Eastern Time, and closed on select federal holidays. However, the exchange will remain open during regular hours on Election Day on November 8.