It may take a few weeks before we know which political parties control both chambers of Congress after last week’s midterm elections. Regardless of the winner, a rally is expected in the stock market in the upcoming weeks. However, that doesn’t mean you wait on the results to develop an investment strategy to match the market trends.
Overall, it’s clear that the expected ‘red wave’ didn’t materialize. The GOP has done quite poorly, even though they will likely win the House. Overall though, we are headed towards a balanced government, which could potentially be something that markets admire.
A divided government could be great for businesses, as the Democrats won’t be able to pass legislation for higher taxes. Public spending could also be lower, reducing inflation and positively impacting equities.
Nevertheless, the impact of the U.S. midterm elections should reverberate in the markets over the next few weeks, especially during the fourth quarter.
Equities are Likely to Perform Much Better after the Midterms
Historically, the stock market has tended to react positively to a split Congress, as investors generally prefer stability over chaos. This year is no different, as the market has been steadily increasing in recent weeks. Of course, timing is also a factor, as stocks typically do better in the immediate aftermath of a midterm election.
Additionally, the third year of a presidential term has historically been the strongest for the stock market, regardless of which party controls Congress. Thus, regardless of the outcome of the mid-term elections, it is likely that the stock market will continue to rise in the coming months.
Mid-term elections have historically had a major impact on the stock market, although that impact has not always been positive. The market typically experiences a small bump in the months leading up to a midterm election, followed by a more significant rally in the aftermath of the election. In the year following the midterms, the S&P 500 returned over a 15% return on average. Moreover, most of the returns were generated within the first three months of the elections.
How Will Midterm Election Results Impact Individual Sectors?
Different sectors of the economy are likely to be impacted differently based on the control of a particular party. For example, if the Democrats win, the cannabis and clean energy sectors will likely benefit. On the other hand, if the Republicans win, sectors such as oil and gas and health care would probably benefit.
However, there are some sectors, such as defense and infrastructure, where both political parties seem to have a common view. So, regardless of who wins the Mid-term elections, some sectors are still likely to remain relatively unaffected.
There has always been a clear divide between Democrats and Republicans regarding funding clean energy initiatives. Democrats have traditionally favored investing in green energy, while Republicans have favored more traditional forms of energy. This political divide has had major ramifications for clean-energy stocks.
In recent years, clean-energy stocks have soared as investors anticipate a shift toward renewable energy. However, with Republicans controlling the government, that shift is unlikely to happen anytime soon. Instead, we can expect much less spending on green initiatives and more theoretical technologies, such as carbon capture, solid-state batteries, and other areas.
A Divided Congress Will Make Tax Legislation Difficult to Pass
It will be interesting to see how the prospects of upcoming significant tax legislation could help financial markets following the midterms. While the Organization for Economic Co-operation and Development (OECD) has proposed a global corporate tax rate of 15% by 2023, its mandate would need to be passed by the legislature for it to take effect–and that’s where things get tricky.
If Congress remains divided following the election, Republicans will likely demand high concessions to agree to the OECD. These concessions will have to be mighty compelling for the Republicans to get them to budge, perhaps individual tax cuts. Consequently, the future of this proposed legislation and any other major tax laws could have significant market implications.
Conclusion: Markets Tend to Perform Well Regardless of Political Party
History shows that markets tend to perform equally well regardless of which party controls Congress. Moreover, with the current uncertainty surrounding the elections, it is best to avoid making rash decisions that could have negative consequences for your portfolio. By staying the course and maintaining a diversified portfolio, you can weather any turbulence that may occur in the aftermath of the midterms and position yourself for long-term success.
