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How US midterms may impact investments

Charlie Reinhard

By Charlie Reinhard

Head - NAM Investment Strategy

April 23, 2018Posted InInvestments and Investment Strategy

The 2018 midterm season is upon us and the latest polling suggests the balance of power in Washington DC could shift in November, creating potential uncertainty. Historically, US stocks and bonds have seen defensive leadership in the May-October period leading up to US midterm elections followed by more cyclical leadership in November-April period following midterm elections. International stocks have outperformed US stocks prior to and after the midterm elections, with both typically rallying afterwards, suggesting one more reason to go global now.


Since 1990, in six of the seven midterms defensive equity market sectors outperformed cyclical ones by 7%, on average, during the May-October months preceding the elections. Conversely, in six of seven periods following the midterms, cyclicals outperformed defensives by 7%, on average, during November-April. By way of comparison, US stocks overall lagged international equities all seven times heading into midterm elections since 1990 with both typically posting strong performance afterwards.

Fixed income

Since 1996, Treasuries outperformed High Yield bonds all five times while Investment Grade corporates outperformed High Yield in four of five occasions in the May-October period leading up to the US midterm elections. Conversely, High Yield bonds outperformed Investment Grade corporates and Treasuries in four of five November-April episodes following these midterms.

2018 midterm outlook

Over the past 21 midterm elections, the President’s party has lost an average of 30 seats in the House and four seats in the Senate. According to the Cook Political Report, it currently looks “fairly likely” Republicans will lose their House majority but there is enormous uncertainty about the Senate where Republicans currently have a 51-49 majority with ten Democratic Senate seats up in states President Trump carried in 2016 versus one Republican seat up in a state Secretary Clinton carried. Of course, things could certainly change between now and November. We would give higher odds to a meaningful infrastructure spending program should Democrats take over control of the House.