The no-lose scenario for stocks after the midterms
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Midterm elections have historically been a no-lose scenario for stocks. Dating back to the 1950s, the S&P 500 has always been higher a year after the midterms, no matter the outcome. According to Capital Ideas, stocks in the year following midterms have performed twice as well as other years.
The bottom line: Markets may shrug if there is a Democratic sweep, because the next Congress is "very unlikely to undo the major market-impactful legislation that has already been passed under President Trump," like tax cuts, strategists at UBS point out.
If Republicans maintain control, stocks could jump higher temporarily, Art Hogan, a strategist at investment firm B. Riley FBR said, because investors will think "here comes more deregulation, and tax cuts 2.0 — but then they will realize we might have more work to do than that."
The impact on the economy is more uncertain.
- If Democrats take the House and the Senate, brace for "slower economic and employment growth," since it eliminates the possibility of another tax-cut boost to the economy, John Herrmann, who heads up interest rate research at MUFG Securities, wrote in a note.
- Gridlock won't "capsize the economic boat," S&P Global's chief economist Beth Ann Bovino wrote in a research note, but it will create big questions around government spending, which boosts economic growth.
What to watch: The midterms are in "second place" on investor's minds after worries about China and trade, Hogan said.
- Bonus data point: The S&P 500 had its worst October in a midterm year since the 1970s, per data compiled by lobbyist Bruce Mehlman.
