November 7, 2022

Tomorrow is Election Day, and while it may take some time to tally up the results, the overall midterm picture has been gaining some clarity.

As we have witnessed so far in 2022, midterm years can be quite volatile for the markets with the average maximum intra-year drawdown for the S&P 500 of 17.1%, but the good news is, the S&P 500 Index has gained 32.0% on average a year off those lows.

• Historically, equity markets have cheered getting past the uncertainty of midterms no matter what the outcome, with a positive year for the S&P 500 following the last 18 midterm elections.
• Mixed government, especially with a Democratic president and a Republican or mixed Congress, has also historically been favored by equity markets and is a strong favorite to be the outcome of this year’s midterms.
• The president’s party typically loses about 30 seats in the House in midterm elections and while the number may not be that large this year, Republicans are a heavy favorite to flip the House, and a 30-seat swing is not outside the realm of possibility.
• Control of the Senate is close enough to call a coin flip, although it has been trending more favorably toward Republicans over the last several weeks as voters focus on the economy. What happens in Nevada, Pennsylvania, and Georgia (which may not be decided until a December 6 runoff) will set the tone for the Senate battle overall, with several other states within polling error of being a toss-up.
• We would expect mixed government to take the possibility of any additional tax hikes off the table for both households and corporations, although the impact is likely already largely priced in. At the margins, it would likely also favor energy, financials, and defense, although macroeconomic forces tend to dominate policy when it comes to sector performance.

Although the markets will continue to have to navigate inflation, higher interest rates and a potentially slowing economy; moving past the mid-term elections has historically been positive for US markets.

Please contact me if you have any questions or concerns.