Heres What Happens To The Stock Market If Republicans Take Congress In November

Will the Democrats hold on to control or can the Republicans take over Congress? if history is any guide, it won’t really matter for stocks because markets typically rally once election uncertainty lifts.

Stocks are off to a rocky start so far this year thanks to a long list of challenges including spikes in inflation and interest rate hikes. the midterm elections in November will make 2022 even more complicated by adding another layer of uncertainty to the investment mix.

Consumer prices are rising with inflation at nearly 40-year highs, supply chain issues persist, and coronavirus cases are on the rise due to the omicron variant. What’s more, the Fed has started to tighten monetary policy in a bid to rein in inflation: Once the central bank finishes cutting its monthly asset purchases in March, it intends to raise interest rates three times this year, something he hasn’t done since. 2018.

“The worst thing that can happen to the Democrats is that they lose control of both houses of Congress. in that case, the market would win by losing and see a slightly improved average performance.”

In November, Republicans hope to regain control of the House of Representatives or the Senate. they will need five seats to win a majority in the House and one seat in the Senate. pennsylvania, wisconsin, arizona, georgia and florida have key elections that could determine whether or not congress changes.

“The most favorable outcome for the markets would be a Republican victory in both the House and the Senate,” says Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. “If Republicans take the House and not the Senate, that would also be a relatively favorable outcome.”

To discover how various election results would affect stocks, Forbes analyzed market data going back to 1945 with the help of cfra research.

In short, when it comes to stock market performance, Democratic presidents have an advantage. From 1945 to the end of 2021, the compound annual growth rate for the S&P 500 has been 9.4% under Democratic presidents compared to 6.6% for Republican commanders-in-chief.

The best returns, however, have been under Democratic presidents controlled by a Republican congress or division. “Historically, investors have preferred shared power across the federal government,” says RSM Chief Economist Joe Brusuelas.

For example, President Barack Obama faced a divided Congress between November 2010 and 2014, with Republicans holding the House of Representatives while Democrats held the Senate. stock investors weren’t complaining: the s&p 500 rose nearly 70% during that period.

s&p 500 returns under various political scenarios

Markets historically prefer Democratic presidents controlled by a divided Republican Congress.

The average return on the S&P 500 in years in which Democrats simultaneously held the Oval Office and both houses of Congress is 10.5%. While those returns are nothing to complain about, the best case scenario for investors, with an average return of 13.6% for the S&P 500, is when a Democratic president presides over a divided Congress. second-best performer, with an average gain of 13%: a Democratic president working with a unified Republican Congress.

“The worst thing that can happen to Democrats is that they lose control of both houses of Congress,” says Sam Stovall, chief investment strategist at CFRA Research. “In that case, the market would win by losing, which means Wall Street will see a slightly improved average return.”

something to watch out for if the Democrats lose: less government spending. President Joe Biden and the Democrats will be much less likely to pass major legislation if the Republicans gain control of the House or Senate. markets often like big government spending. consider stocks rallied after the biden administration passed its $1.2 trillion infrastructure bill last november while stimulus spending gave markets room to run as the s&p 500 gained 26% in the 12 months after March 2020.

The Democrats’ latest budget bill, the Build Back Better Act, includes more infrastructure and climate spending, but has stalled for months after strong opposition from Sen. Joe Manchin (D-W.VA). With the midterms just around the corner, and the Democrats’ prospects looking dim, BBB should pass before November, as it is unlikely to pass if the Republicans take the House or Senate. that means less spending for the markets to trust.

So how will stocks fare between now and November? years with midterm elections tend to have weaker stock returns overall. The second year of a presidential cycle has some “unique features, and none of them are investor friendly,” says James Stack, president of investech research and stack financial management.

s&p 500 returns in the presidential cycle

average & price change

The second years of presidential terms, which Stovall refers to as the “second-year recession,” produce the lowest average return in the S&P 500: just 4.9%. furthermore, the second and third quarters of the intervening years show the worst returns, with an average decrease of 1.8% and 0.5%, respectively.

2022 could be worse than average due to concerns about inflation, variants of covid, supply chain delays and tighter monetary policy from the Federal Reserve. “there is nothing that the market dislikes more than uncertainty, and that will lead to increased volatility, especially in 2022,” says stack, who emphasizes that monetary policy could scare markets even more than expected thanks to the Federal Reserve plan to rapidly reduce its balance. leaf.

“Risk has rarely been higher from a valuation standpoint, and is now rising significantly from a monetary standpoint,” he says.

However, there is good news on the horizon. historical data shows that the fourth quarter of intervening years and the first quarter of the following year boast the two strongest returns of the entire presidential cycle, rising 6.1% and 7.5% on average, respectively. “By then we will also have had at least one, if not two, interest rate hikes and investors will realize that the world has not come to an end,” Stovall says.

Stocks Rise After Midterm Elections

s&p 500 average returns in the six months before and after the midterms

the fairness party continues well into a president’s third year in office when there is a push to stimulate the economy before the next election. It is no coincidence that the best returns in the market occur during this period; the s&p 500 is up an average of 16% in that third year. What’s more, in the six months since the midterms, November through April, the S&P 500 has gained 14.3% on average and is up in price 95% of the time.

“Very often you will see a positive reaction to midterm elections, regardless of which party wins,” says stack.