October 1, 2018

Potential Impacts of Midterm Elections

Next month, all 435 seats of the U.S. House of Representatives and 35 of the 100 seats in the Senate will be up for grabs in the midterm elections. Historically, congressional midterms have had much lower turnout than Presidential elections, but this year has a lot of issues at stake – not the least is the potential for in-depth Congressional investigations and the possible impeachment of a sitting president.

But putting all of that aside, let’s take a look at how various scenarios could impact the investment markets.

Republicans Retain Control of Both Houses in Congress

This would likely lead to more social and economic policy changes in the future, such as further reduced taxes, more trade disputes in North America and throughout the world, stronger control of immigration and a new healthcare bill that reintroduces medical underwriting for pre-existing conditions. The coal industry, financial and consumer discretionary sectors also are poised to benefit.

On one hand, investor confidence has been strong and could continue to support the long-running bull market. On the other hand, the current administration’s approach to many policies are far outside the mainstream, so continuing this strategy coupled with the unpredictability of President Trump could start to weigh heavily on the markets.

Democrats Take Control of One Branch

Congress will be divided, which puts most legislation in gridlock. However, a stalemate offers stability and predictability, which the markets like, so it could serve to sustain the bull run. In addition, the one common ground on which Democrats and Republicans can agree is the need to bolster the nation’s infrastructure, so there could be substantial investment in industrials, materials and utilities.

Democrats Take Control of Both Branches

Potential impeachment proceedings could temporarily roil the market. However, subsequent changes might include ending global tariffs and a greater focus on clean energy, green infrastructure and the healthcare industry, with less emphasis in the financial, energy and defense sectors.

Regardless of how the power structure lands after midterms, it’s worth noting that historically the midterms have yielded largely positive market performance. In fact, every midterm election year since the 1940s has yielded a positive return.

Risk Factors

In addition to potential changes in Washington, there are other factors to consider in today’s economic environment. First, the threat of rising inflation coupled with ongoing low unemployment increases the chances of more interest rate hikes by the Federal Reserve Bank.

Subsequently, the rising value of the dollar could threaten the current positive environment for earnings. Recent U.S. sanctions on Iran have given way to increasing oil prices, and there is a general sense of global instability among both allies and adversaries that present geopolitical risks to investments abroad. And finally, should the United States experience a political crisis as a result of the midterm elections and/or the ongoing investigation into the 2016 presidential campaign, the markets could see a dramatic drop in consumer confidence.

One historical trend that is likely to continue this year is increased market volatility in the month leading up to the midterm elections, driven by political uncertainty. With this in mind, remember that temporary price declines provide an excellent opportunity for investors to expand portfolio positions for the future. Also remember that as we approach the year’s end, it could be a good time to harvest gains and reposition assets for higher growth in 2019.


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