The impact of the US midterm elections will certainly be felt over the next few months and likely for much longer. Election officials are still cementing the final vote tally – Georgia’s race for the Senate remains ongoing and could go until the second round on December 6 – but Congress will certainly be different until 2024.
That, however, doesn’t seem to bother many Americans investors which will largely stick to the plan.
According to data from the Hartford Funds Midterm Elections Survey, 73% of women do not plan to change their portfolio in light of the election, compared to 53% of men.
Additionally, 81% of baby boomers and 64% of Gen X investors (aged 42-57) do not plan to change their portfolio due to medium-term maturities.
There are demographic exceptions, however: The Hartford reports that 75% of Gen Z investors (ages 18-25) and 65% of Millennial investors plan to make changes to their portfolios.
Here are four ways the U.S. midterm election could affect the stock market, given the likely shift in power in at least one chamber of Congress, along with advice on how investors should react:
- Stocks are more likely to rise after the midterm elections.
- Less spending on clean energy initiatives.
- Specific sectors could benefit from it.
- Midterm elections may impact tax rates.
- Should portfolios change based on election results?
Stocks are more likely to rise after the midterm elections
While the ripple effect on stocks is hard to predict with Senate seats still contested, change is in the air as Republicans are likely to claim a majority in the House of Representatives.
Wall Street loves a “split bill” in Washington. Historically, the US stock market views a divided Congress as a positive development, as investors seem to prefer stability over chaos, and that is usually what a divided government provides.
Timing is also an issue, as stocks tend to do better immediately after a midterm election, regardless of which party controls Congress. Additionally, the third year in a presidential term has consistently been the strongest for the S&P 500, regardless of election results, according to Morningstar data.
Basically, the S&P500 underperformed in the months leading up to a midterm election. Over the past 60 years, the S&P 500 has averaged a 0.3% return for investors in the year leading up to the midterm elections. However, the S&P 500 returned an average of 16.3% in the one-year period following the midterm elections over the same period, and most of those returns were generated in the first 90 days after a midterm election.
“This trend occurred regardless of which political party took the lead in the House and Senate; therefore, the statistics are definitely in favor of a positive midterm election effect for the market,” says Guido Petrelli, CEO of Merlin Investor, in West Palm Beach, Florida. “Yet this time the market may behave differently given the historically high levels inflationglobal geopolitical tensions and the lingering pandemic.”
Still, given the market’s struggles over the past few months, “the overall result could continue to be positive,” Petrelli said.
Less spending on clean energy initiatives
Republicans have always clashed with Democrats when it comes to spending on green energyand this has ramifications for climate change financing.
“We expect to see significantly less spending on green initiatives and more theoretical technology,” says Aaron Rafferty, CEO of BattlePacs, a voter engagement platform in Sheridan, Wyoming.
Regarding the recently passed Inflation Reduction Act and the clean energy subsidies attached to that legislation, many analysts do not see these policies disappearing any time soon, as efforts to roll back the landmark climate change law could face stiff opposition and could be unpopular with industries that stand to benefit. However, a Republican majority in Congress could make the Biden administration’s path on climate issues somewhat muddier.
Specific sectors could benefit
One strategy that could benefit from the outcome of the midterm elections is to focus intensely on certain stock sectors.
“Depending on the final midterm results, some sectors may benefit more from the nomination of one party rather than another,” Petrelli said. “Democrats could give a boost to sectors like cannabis and clean energy, while sectors like oil and gas and health care would likely benefit from a Republican victory in Congress.”
“Given a House Republican, we should also see some weight lifted on the financial sector in favor of heavier giants like BlackRock and JP Morgan and away from more consumer-related services like Robinhood,” Rafferty said.
However, not all sectors are likely to be influenced by a shift in political power. “The two political parties also seem to have a common understanding of certain sectors, such as defense and infrastructure,” adds Petrelli.
Midterm elections may impact tax rates
The outlook for significant tax legislation that could impact financial markets beyond this year depends almost entirely on election results.
“We know neither party wants a government shutdown in December, so there has to be a rolling bill that deals with government funding,” said John Gimigliano, senior manager of the Federal Legislative and Regulatory Services group at KPMG US in Washington, DC.
While Americans will have to wait and see what actually happens in congressional negotiations, KPMG predicts that four major interrelated tax extensions will dominate tax law discussions: the Research and Expenditure, or R&E, Expenditure Rule; the interest deductibility provision; extending the enhanced child tax credit; and depreciation premium.
In addition, the Organization for Economic Co-operation and Development (OECD) agreement that would make mandatory a 15% minimum overall corporate tax rate in 2023 will be on the legislative table, which could have a significant impact on US equities.
“If we end up with a divided Congress, the price Republicans will put on the table for agreeing to the OECD deal will be very high,” said Jen Acuña, director of federal legislative and regulatory services at KPMG. “There will have to be a really compelling Republican demand in a bill to get them to swallow that bitter pill – maybe individual tax cuts and more.”
“Still, it’s hard to see a realistic scenario where there would be bipartisan support for the current global deal as it stands, at least in the short term,” adds Acuña.
Should portfolios change based on election results?
Should Main Street investors change their investment strategy based on the outcome of a midterm election? Not really, say investment experts.
“History tells us that markets don’t care who runs Congress, whether the results favor Democrats, Republicans, or even when they’re mixed,” Kelly Klingaman, founder of Kelly Klingaman Financial Planning, told Austin, TX. “Due to the markets’ long-term historic growth, Main Street investors are best served by remaining disciplined in their investment strategy and eliminating the noise of fear and greed in the interim.”
That seems to be the consensus no matter what happens with election results over the next few weeks, including the Senate runoff in Georgia.
“Even if the Republicans take both chambers, in the Senate the majority will be very limited,” adds Petrelli. Investors are best served by not making drastic portfolio changes based solely on the 2022 midpoints.