History 101: U.S. mid-term elections and market rallies
Author: Kevin McCreadie
September 20, 2018
With less than seven weeks until the mid-term US elections, markets are already bracing for a shift in the balance of power in Washington and what it may mean for both domestic and foreign policy.
The Nov. 6 elections could conceivably see Republicans lose control of the House of Representatives, though less likely the Senate, causing some short-term risk and investor pain.
This week, for example, respected political and economic pollster FiveThirtyEight is forecasting the Democrats have a five-in-six chance of winning control of the House.
Source: FiveThirtyEight.com, September 17, 2018.
The mid-term elections are typically seen as a referendum on the President, and part of a system of checks and balance on the U.S. political system. Currently, Republicans control both levers of power in Congress—the House and the Senate. House members serve two-year terms, and voters will cast ballots for all 435 seats in November. Because senators serve six-year terms, just 35 of the Senate’s 100 seats will be contested this year.
If polls prove correct, and Democrats wrest control of the House, a simple majority could trigger a Presidential impeachment process and kick-off a full trial by the Senate. Our view is that’s an unlikely scenario. We believe these efforts will ultimately be thwarted given the requirement of a two-thirds majority in the Senate in order to convict the President. But the spectacle of impeachment hearings could create more noise and pose some headline risk for equity markets.
However, we believe the longer-term view looks extremely positive if historical trends prevail. Looking at the performance of U.S. equity markets during mid-term election years (there have been 17 since 1950), a pattern emerges: a soft-ish September, followed by outsized returns. The S&P 500 has rallied an average of 14.5% between the end of August and the close of March during mid-term election years.
Source: UBS Research, August 2018.
What’s more, mid-term rallies have not historically been impacted by a shift in power. In fact, the only two mid-term election years where there wasn’t a positive return through the end of March were years in which the House or Senate did not change party hands. In other words, when the President’s party loses seats in Congress, historically it has been positive for investors. Typically, markets cope well enough when there is division in Washington. The U.S. economy is already benefitting from Trump’s profit-friendly policies such as tax reform, repatriation and deregulation. But it’s also threatened by ongoing trade talks and protectionism.
At this point, it’s difficult to know if historical trends are likely to triumph. But if they do, a check on Presidential power could ultimately be welcomed by markets.
Kevin McCreadie is president and chief investment officer at AGF Investments Inc. He is a frequent contributor to the AGF Perspectives blog.
Commentaries contained herein are provided as a general source of information based on information available as of September 17, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
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