While everyone is focused on monetary policy decisions, the U.S. midterm elections are scheduled for November 8. Americans will go to the polls after the November 2020 presidential election and Joe Biden's victory over Donald Trump.
This is perhaps the most important event of the next few days: the results can have a huge impact on future decisions of the US government. So what are the possible outcomes?
In this Weekly Insight, John Plassard presents three different scenarios.
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Good morning and welcome to Weekly Insights with John Plassard.
While everyone is focused on monetary policy decisions, the most important event of the next few days may be the US mid-term elections. The mid-term elections are scheduled in the United States on Tuesday, 8 November, to be precise.
After the presidential election of November 2020 and Joe Biden’s victory over Donald Trump, Americans will go to the polls in the middle of the presidential term.
In addition to a multitude of local elections, there will also be contests to renew the House of Representatives and more than a third of the Senate.
Mid-term election years are usually volatile for stocks, as Republicans and Democrats vie for control of Congress, especially under new presidents.
The incumbent president’s party typically loses seats in the House of Representatives (according to the Stock Trader's Almanac).
Given the very narrow margins Democrats have in the House and Senate, they could easily lose control of Congress in the mid-term elections.
The results of the mid-term elections can have a substantial impact on the future decisions of the US government. In any case, there are 3 possible scenarios:
- The Republicans regain control of the House and Senate. If this happens, there is likely to be legislative gridlock and a more limited range of fiscal policies. In this scenario, President Biden could issue some executive orders and take other action not requiring Congressional approval.
- Republicans win either the House or the Senate but not both. In such a scenario, decisions would likely focus on policies with limited bipartisan agreement, as we have seen with infrastructure spending. More importantly, if the Republicans take control of the US Senate, that will reduce the chances that President Biden will get approval for appointments that require Senate confirmation.
- The Democrats retain control of both houses. This outcome would be a surprise and would shift attention back to President Biden's policy agenda, including the comprehensive "Build Back Better" legislative package.
The package includes measures expanding social services, clean energy investments and subsidies, raising or eliminating the cap on state and local tax deductions, and raising corporate and personal taxes.
Finally, historically, the S&P 500 has outperformed the market in the 12 months following a mid-term election, with an average return of 16.3%.
This is particularly true for the one-month and three-month periods following the mid-terms, which have historically outperformed years without mid-terms.
Have a great week, stay safe and keep on winning.
