Analysis: Midterm elections in the US could add more risk to the shaky stock market

The United States Capitol building is seen in Washington, United States on September 4, 2022. REUTERS / Elizabeth Frantz

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NEW YORK, Sep 13 (Reuters) – Another source of potential stock market volatility looms in an already difficult year for Wall Street: the approaching US midterm elections that will determine which political party will control Congress.

Republicans are expected to make gains in the November 8 vote, creating a scenario favored by many investors because it would split the government now controlled by President Joe Biden’s Democratic party. Historically, a divided government has been more pro-action than when Democrats control both the House of Representatives and the Senate along with the presidency. Read more

But the odds for Biden’s Democrats have improved, according to betting sites and polls. A tighter run has raised concerns on Wall Street that Biden may be able to raise taxes on investors and corporations by tightening regulations in sectors such as healthcare and banking.

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The growing uncertainty ahead of the elections “would potentially be a source of unease in the markets,” said Walter Todd, chief investment officer of Greenwood Capital.

As of September 12, Republicans had a 74 percent chance of gaining control of the House versus an 88 percent chance on July 13, according to data analytics website FiveThirtyEight. It gave Democrats a 69% chance to control the Senate, while Republicans’ chances exceeded 50% until late July.

On the PredictIt betting site, the cost of a contract for Republicans to win the House has dropped to 75 cents from over 90 cents at the end of June. The contract pays $ 1 if correct.

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IS THE GRILL GOOD?

Election fears haven’t had a big effect on markets so far this year, with investors consumed by the Federal Reserve’s huge rate hikes to tame rising inflation. Read more

Worries over the vote may become more evident as November approaches. Many investors believe that the divided government makes radical reforms less likely to pass, keeping the investment environment more stable.

“The market tends to like the stalemate,” said Nadia Lovell, senior US equity strategist at UBS Global Wealth Management. “I think it’s fair to say that a divided government is what investors right now expect and are positioned for.”

Historical data has shown that stocks tend to do better in times of divided government, although investors have warned that data is limited and that markets have generally risen over time, regardless of the composition of the government.

Average annual returns on the S&P 500 were 14% in a divided Congress and 13% in a Republican-held Congress when a Democrat is in the White House, according to data from 1932 analyzed by RBC Capital Markets. This compares to 10% when Democrats controlled the presidency and Congress.

“A CLOSER CALL”

In a report this week, analysts at Goldman Sachs said the result “feels like a closer call,” with early election results and some polls “suggesting Democrats are in a better position than just a few months ago.” “.

A Democratic Congress would give Biden a better chance to put more of his agenda into action, perhaps including proposals to raise maximum corporate, capital gains, or individual income tax rates, according to Goldman. Investors generally consider such tax measures to be hostile to the markets.

Stocks in some sectors could be particularly volatile if elections start to lean towards Democrats. For financial services, a Republican patrol of Congress represents “the most advantageous scenario … as the GOP resists efforts to curtail the activities of large financial institutions,” UBS analysts said in a report.

Likewise, for health care, most legislation affecting the industry “is unlikely to make much progress if one of the chambers of Congress passes to Republican control,” according to UBS.

The financial sector S&P 500 (.SPSY) fell 11.7% at the close on Monday this year, while the healthcare sector (.SPXHC) was down 7.1%. The S&P 500 was down 13.8% year to date.

Despite the potential for short-term volatility, the market overall performed well in the 12-month period following the mid-term votes.

Since 1950, the S&P 500 (.SPX) benchmark has risen in all 18 12-month periods following the midterm elections, according to LPL Financial

“There is a political and political uncertainty heading into the medium term that is cleared up after the election and equities tend to see a relief rally from that,” said Jeffrey Buchbinder, chief equity strategist at LPL Financial.

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Reportage by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio

Our Standards: Thomson Reuters Trust Principles.

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