Now that the results of the midterm election are in, prognosticators will be trying to assess its impact for the financial markets. Our view is that it’s best not to jump to any hasty conclusions.
See some highlights below on implications for policy, sectors and performance.
Historically, the Market Performs Well After Midterm Elections
In the past, midterm elections have not had a major impact on the financial markets or provided reasons for investors to make major changes to their investment plans. It’s critical to take a step back and let history be our guide.
Midterm elections are rarely kind to the political party of the sitting president. Presidents have almost always dropped House and Senate seats in the first midterm election, with only a few exceptions. George W. Bush, in the aftermath of 9/11, was the only president able to pick up both House and Senate seats. The number of seats lost often correlates with the president’s approval rating. Less popular presidents have lost upwards of 40 House seats and four Senate seats, while popular ones have been able to stem the losses.
Markets Even Seem to Prefer a Divided Government
Investors fear that a divided government—with a Democratic-controlled House of Congress in opposition to a Republican administration—could derail President Trump’s agenda and put an end to the current market cycle. But throughout history, markets have often performed better with a divided government.
Even with a Congressional Change, All Eyes Are on the Executive Branch
While changes in Congress could lead to more legislative gridlock, the President’s ability to act independently may influence markets more. Of course, the elections will impact what policy decisions can be made. Since taking office, President Trump has signed over 175 bills into law including the landmark Tax Cuts and Jobs Act. With Democrats having greater influence, it will now be difficult for the full Republican agenda to be enacted.
Even without support from Congress, the President can still influence policy such as trade agreements by issuing executive orders. The prospect of tariffs and a strong U.S. dollar is a risk to global growth.
Policy Decisions May Impact Sector Performance Over the Short Term
Assessing the impact of public policy on individual sectors of the U.S. equity market can seem like complicated guesswork. Nonetheless, investors can still try to entertain some forward-looking scenarios and thought experiments.
Ultimately, the Issue of Impeachment May Come to the Forefront
While the results of the midterm elections may have short-term sector implications, they may also bring the issue of impeachment to the forefront.
With Democrats gaining a majority in the House of Representatives, there is a distinct possibility that the House could vote to impeach the President. How might that impact the financial markets? Again, history suggests there may be a spike in market volatility, but perhaps not a severe or extended one that could topple the current bull market. However, in addition to a House vote, removing the President from office cannot happen unless the Senate also votes for it—by two-thirds majority for a conviction.
The Bottom Line: Politics and Short-Term Investing Don’t Mix
Political surprises and machinations may have short-term market implications but have proved to be mere blips in the long-term advance of the market. And while it may be exciting to talk politics, history offers compelling evidence that the current political environment should not influence investment decisions. It is human nature to think the present moment is exceptional and greatly different from anything that has gone before. But the market has weathered “unique” political environments before, and the past has generally demonstrated the value of developing a long-term plan and sticking to it, regardless of who is controlling Washington.
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