Elephant Vs. Donkey: How the midterm elections in the U.S. can affect the markets

As the U.S. braces for a closely-fought midterm election, investors are feverishly preparing for possible opportunities to take advantage of, as according to historical data, midterm elections tend to have a direct correlation to the markets, and especially stocks.

The midterm elections in the United States will determine the new Senate as well as the house of Congress. Historically, the president’s party is inclined to lose seats in congress, and the opposing party is likely to gain control of one or both houses of Congress, leading to what we call a “Divided” or ”Split” Government.

Speaking of historical data, the record shows that during 17 of the 19 midterm elections since 1946, there has been a spike in market performance for at least six months following the election compared to the six months leading up to it.

When it comes to the US dollar, the usual appreciation of the currency stems from investor sentiment regarding increased government spending by the new Congress. However, this year, the general expectation is that due to the high levels of spending and stimulus because of the pandemic, it would be improbable to see a significant infusion of funds.

When it comes to equities, however, it is an entirely different story.

A (likely at this point) victory of the Republican party would usher in yet another split government, which would mean that major policy changes presented by the president would be hindered, as Congress, which has to approve the motions, would be controlled by the opposing party. This outcome is, however, perceived as favorable for stocks and indices.

In the Defence sector, given the current geopolitical tensions, it is likely to see a rise in stocks related to defense contractors regardless of which party emerges victorious. In fact, the S&P 500 aerospace and defense index has already seen a 10% rise this year.

Energy stocks could also see significant movements given a Republican victory in both Congress and Senate, as they are more likely to push for more energy production in the U.S. While this could favor oil exploration companies, it may be detrimental to stock by pressuring oil prices.

When it comes to clean energy, however, a potential Democratic win could be extremely beneficial for the sector. Given that Democrats are able to maintain control of Congress, legislation favoring clean energy, including tax credits and investment, could lead to a boom in the respective market.

In the Healthcare sector, a Republican win could immensely benefit pharmaceutical companies as Democrats recently pushed through a law for lowering the price of prescription drugs.

In the end of the day, though the odds favor a Republican victory, this year’s midterm elections seem to be very closely fought, with the elephant (Republican party) holding 48 seats and the donkey (Democratic party) holding 46 seats up to the point that this article was written.

No matter what the final outcome will be, it seems that opportunities will arise in the markets, especially regarding stocks and indices. The good news is there is still plenty of time to prepare, as depending on possible recounts or legal challenges, the final results could still be weeks away.

By Mario M. Plousiou

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