NEW YORK – Investors are now paying attention to the midterm elections on Tuesday, which will decide who runs the U.S. Congress.
Polls and betting markets show that Republicans are likely to win control of either the House of Representatives, the Senate, or both. If this happens, there will be a split government, with Democrat Joe Biden as president.
Here are some possible effects of Tuesday’s vote on the market:
**When a Democrat was in the White House, the stock market did best when the House, the Senate, or both were controlled by Republicans.
RBC Capital Markets looked at data going back to 1932 and found that the average annual return on the S&P 500 was 14% when there was a split Congress and 13% when there was a Republican Congress and a Democratic president. When Democrats ran the White House and Congress, that number was 10%.
This year, the S&P 500 is down 20%.
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**Many strategists are also quick to point out that the stock market has a perfect record after midterm elections. Since World War II, the S&P 500 has gone up every year after the midterm vote 19 times in a row (ETR:DBKGn).
According to Oxford Economics, the S&P 500 has gone up by an average of 15% in the year after the midterm election over the past 18 political cycles.
Investors say that the boost after the midterms could be caused by a number of things. For example, some say that the vote tends to make the policy outlook clearer.
But some people are worried that the streak might end this year because they think the economy is headed for a recession.
**Investors tend to like political gridlock, but a split government could lead to a nasty fight over raising the U.S. debt ceiling. This could increase worries about a U.S. default and make the market more volatile.
In a recent note, BTIG said, “We think the divided government scenario that serves as our base case will lead to budget fights like the ones we saw from 2011 to 2013.”
Healthcare, energy, and defence could be some of the stock market sectors that change the most after the election.
A Republican win could make people less worried about plans by Democrats to pass stricter rules on prescription drug prices, which could help pharmaceutical and biotech stocks. A GOP win could also make people think that the government will spend more on defence and pass laws that help the fossil fuel industry.
Shares of clean energy and cannabis companies could rise if the Democrats win by surprise. This is because people think the party is more likely to support laws that help these industries.
**Mike Wilson and other strategists at Morgan Stanley (NYSE:MS) wrote on Monday that if the Democrats win, Treasury yields could go up and the dollar could get stronger. This is because they think that higher government spending could make inflation worse and force the Federal Reserve to raise interest rates more than expected.
