SUMMARY
If the Republican party picks up enough seats in the upcoming US mid-term elections on November 8, 2022, no single party will hold the keys to the White House and both chambers of Congress. In the past, stock market returns have been higher when power is split in Washington rather than united.
- The signs favor the Republicans flipping the house and possibly the Senate too. The key Senate states to watch are now Georgia, Wisconsin, Nevada, Arizona, Pennsylvania, New Hampshire, North Carolina, Washington, Colorado, Ohio and Florida.
- As the election draws near, it seems as though undecided independents are following a familiar pattern and breaking towards the party not occupying the White House. While the betting site, PredictIt, has given the Republicans high odds of flipping the House all year, the odds of the GOP taking the Senate dropped in July and August, before mounting a meaningful comeback.
- On average, equities have performed poorly during the first three quarters of mid-term election years, and much better in the three quarters that follow. In 2022, the S&P 500 has returned -24.8% through September 30 and 7.6% since that date.
- If this bounce continues, we plan to view it as being counter-trend. The Fed raising rates into a slowing economy poses a significant challenge for the market in the months ahead, in our opinion. We see 70% odds of a recession. As a result, we remain invested but in a defensive, late-cycle manner.
- In 2022’s Inflation Reduction Act, Democratic lawmakers passed legislation that allows Medicare to negotiate lower some drug prices while also encouraging the transition towards clean energy. Not too surprisingly, pharma stocks have followed the GOP’s prospects relative to the S&P 500 in recent months, as have traditional energy stocks relative to clean energy stocks.
- Markets have tended to be defensive heading into the midterms and
risk on
afterwards. Until now, the stock market’s poor year-to-date performance is in keeping with its seasonal pattern where, on average, the first three quarters of a midterm election year have produced the most subpar returns of the Presidential cycle. The Fed’s rapid policy tightening to arrest inflation this year has been a key driver in the market’s poor showing, in our view.
