Wednesday, November 9, 2022
The main takeaway from election results currently is likely a mixed government, which we continue to view as market-friendly overall. There’s still some counting to do in some key races, but it remains very likely Republicans will take the House. At a high level, the outcome was probably largely priced in, which explains the fairly subdued market impact this morning.
Democrats are favored to take the Senate as of this morning, with the outcome dependent on still-undecided elections in Georgia, Arizona, and Nevada. Republicans need two of those three seats to take control of the Senate. Georgia, which is headed for a runoff election on December 6, looks like a coin toss.
Assuming Republicans take the House, we believe it would be a market-friendly outcome no matter what happens in the Senate. Markets don’t react well to uncertainly so political gridlock is normally a favorable outcome as new measures from the administration are thwarted by the opposing party. As shown in the LPL Research Chart Day, historically a Republican congress under a Democrat President has been the strongest environment for stocks but a split congress (under a President from either party) also sees above average returns.
The biggest implication of Democrats holding the Senate would be on the regulatory front, as it would be easier for Democrats to confirm nominees with a stronger regulatory stance.
A Republican win in the House likely takes any potential tax hikes off the table, including taxes on corporate buybacks, and makes fiscal spending in a possible recession at least more restrained. In addition, the GOP can influence the regulatory agenda with positive implications for financials, energy, and healthcare.
While overall we see a split government as positive for the markets there are some added potential risks. The path to raising the debt ceiling may become more difficult, and markets have usually reacted negatively when it starts to look possible that the U.S. may default on its debt. Additionally a recession may be incrementally deeper, if we have one, due to a likely smaller fiscal response in a split government.
Looking ahead markets have historically done well in the year after midterms in fact, they have been higher 18 out of 18 times in the following year dating back to 1950, with nearly identical historical returns under Democratic and Republican presidents. This is no guarantee that it will happen this time, of course, and the S&P 500 has been higher about 80% of all years over that span, so 18 out of 18 is only somewhat above expectations. Still, there are a few possible fundamental reasons for market strength following midterm elections. Primarily, the uncertainty associated with the election is over but also midterms usually provide something of a course correction from presidential elections. Markets may anticipate prospects of a better policy balance ahead, regardless of who is in the Oval Office.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value