At the time of writing, the vote count is still undergoing, and neither the House of Representatives nor the Senate has been called yet. Just like in 2020, it’s very close, and it can take a few more days before we have the final results.
Before Tuesday, the expectations were for a “red wave”. Soaring inflation and a generally weaker state of the economy, coupled with the fact that the incumbent party historically tends to fare worse in the midterms, resulted in various news media predicting a very strong resurgence of the GOP, both at the House and at the Senate. The same journalists were quick to change their narrative on Tuesday night when the wave did not materialize. Various reasons have emerged for this different-than-expected outcome: partially, this is related to the polls, which proved even less reliable than usual; at the same time, too much emphasis was posed on inflation and economic data, and too little attention was given to social issues, such as the overturn of Roe v. Wade, that was generally supported by the Republican Party.
As mentioned, a change in control at the midterms is quite common. These elections are considered a performance review of the current administration. All the seats in the House are up for re-election every two years, while about a third of the seats in the Senate are open for election. According to data from Reuters, 13 of the last 19 midterm elections (since World War II) resulted in the incumbent party losing seats in both chambers. The only midterm that resulted in a gain in seats for the President’s party happened in 2002, and the result is largely attributed to the effects of 9/11.
This year, the incumbent Democratic Party already had a very small majority after the 2020 Presidential election, and the outcome is still very much in the open.
What happens in equity markets after midterm elections? Historically, the US equity market tends to outperform in the months after the midterms. The reasons or the theories behind this are various: first of all, and this is obvious, political uncertainty is reduced. In the case of political gridlock, less legislation is likely to pass, and the laws that are passed are likely to be less controversial. In the past, there have also been strong expectations of increased government spending that drove the outperformance of the market, but this might not be the case this year: if the Republicans gain control of at least one chamber of the Congress, they might threaten the incumbent administration with a debt ceiling dispute next summer, thus forcing the executive to limit government spending. Some observers claim that even a narrow Republican majority in the House would mean the end of President Biden’s domestic agenda.
For the time being, we keep monitoring the results and enjoying the relief to the market that is being offered by the fourth consecutive month of decreasing inflation.
We thank you for your continued support.