All the consequences of the US elections on the markets
The possible financial scenarios of the mid-term elections in the United States. The analysis by George Brown, Schroders economist
Midterm (or "midterm") elections are rarely in favor of the president's party. Of the 19 midterms held since World War II, it was only in 2002 that the incumbent president managed to win both the House of Representatives and the Senate.
Falling gasoline prices, coupled with a key legislative victory with the Inflation Reduction Act and the Supreme Court's decision to revoke abortion rights, helped turn the tide in favor of Democrats.
However, things could change again before the Americans go to the polls on November 8. In view of this, here are three possible outcomes of the mid-term elections and the possible reactions of the market.
Outcome 1: Divided Congress
At present, this is the most likely outcome. Republicans are given an 80% chance of taking over the House of Representatives, while in the Senate, Democrats have a 60% chance of retaining control. From a legislative point of view, this situation is problematic. A Republican Chamber would block biased bills introduced by Democrats. Furthermore, a wave of congressional investigations would be unleashed that would devour the administration's time and resources.
From a markets perspective, however, a stalemate on Capitol Hill would favor risk assets. Being forced to compromise serves to moderate the more extreme inclinations of each party, offering investors a more stable political scenario. The data corroborates it: US stocks posted an average annual gain of 12.9% when a president faced a divided Congress, which compares with a more modest 6.7% increase when a Democratic president controlled both. rooms.
However, stocks have fallen over most of the midterm years since 1958, before bottoming out in October, similar to the 20% drop recorded this year by the S&P 500, and we believe stocks still have to go down. Earnings expectations remain overly optimistic as we believe a global recession is imminent. Earnings expectations are expected to adjust for 2023, after which equities may begin to recover.
Outcome 2: Republicans conquer the House and Senate
In this scenario, Republicans secure control of both Houses of Congress. This is less likely than the first, since – although all 435 seats in the House are contested – only 35 of the 100 Senate seats are up for grabs. And of the 14 defended by the Democrats, the best prospects for Republicans are Georgia and Nevada, which are, in fact, 50 percent for both parties. The fact that the Democrats are ready to take over Pennsylvania is another headache for the Republicans.
That said, the Republican Party has recently regained ground which, if maintained, could win the House and Senate. Apparent control by Congress, however, would not allow them to pass biased bills, which would be vetoed by the President, whose decision can only be overridden by a two-thirds "super majority" in both houses.
In this scenario, little should be expected at the legislative level, which should support the actions. But Republicans could also take a tougher approach to controlling fiscal discipline. This could result in a showdown similar to that of 2011, when Biden (then vice president) had to strike a last-minute deal with Republican leaders to avoid a U.S. default, resulting in the first downgrade of the states credit rating. United: A combination that caused the S&P 500 index to drop by nearly 20%.
Result 3: Democrats cling to the status quo
Earlier this year, imagining the Democrats retaining the triad – the Presidency, the House of Representatives, and the Senate – seemed like an impossible hypothesis. But now they are in a position where they could realize what was previously a utopia.
Democrats would be encouraged to carry on the president's program. Increasing the maximum rates of corporate, income and capital gains taxes would all be on the table. As well as the tightening of regulation in sectors such as banking and healthcare. The affected sectors may experience some initial selling pressure. And while broader risk sentiment could benefit from a looser fiscal stance, investors should consider the possible implications for monetary policy.
However, this will largely depend on the degree of success the Democrats can achieve. The Party has found it difficult to fully realize the president's ambitions, given his current weak grip on the House and Senate. This was especially the case in the latter, where centrist Democrats Joe Manchin and Kyrsten Sinema resisted some of the more liberal reforms. Unless the party manages to win more seats in both houses, it will continue to face the same challenges of the last two years.
Mid-term elections are important for the markets
For the midterms, as mentioned, the optimal result from the equity point of view would be the one in which the stalemate prevails on Capitol Hill. But historically, stocks have performed well regardless of the composition of Congress. A determining factor for sentiment over the next couple of years will be the extent to which the Federal Reserve will have to raise interest rates to contain inflation. And this will partly depend on which party, if any, wins the mid-term elections.
A sizeable democratic presence would likely pursue policies that would ultimately stimulate, making it necessary to maintain higher rates for longer. While a more evenly divided Congress would increase the likelihood of political paralysis, giving the Fed a chance to calibrate policy without hindrance. Furthermore, with the Republicans taking over Congress, the legislation would be virtually non-existent, albeit with the risk of another fiscal stalemate.
The midterms will also serve as a litmus test for Donald Trump's chances of regaining the White House. While he hasn't explicitly confirmed that he will run in 2024, he has a 25% chance of winning, according to betting site Betfair.
During his presidency, the markets had a rough four years, characterized by geopolitical tensions and repeated attacks on the Fed. In the end, however, the S&P 500 posted an impressive 13.7% annualized return over the period.
It remains to be seen what the outcome will be, with a game still open. But ultimately, a poor mid-term election result for both parties will translate into a good result for investors.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/impatto-mercati-elezioni-meta-mandato-stati-uniti/ on Sun, 23 Oct 2022 06:03:42 +0000.