Topline
Major stock indexes rose Monday as investors prove optimistic about U.S. midterm elections Tuesday that could break up Democratic control of Congress—this is why experts expect midterms to be a boon for markets.
Stocks typically rise following midterm elections.
Key Facts
The Dow Jones Industrial Average soared 1.3%, or 425 points, hovering near its three-month high, while the S&P 500 rose 1% and the tech-heavy Nasdaq gained 0.9%.
The modest jump comes ahead of the closely contested midterms that will likely flip House and Senate control to Republicans, with FiveThirtyEight giving Democrats just a 17% chance at retaining their majority in both chambers of Congress (Democrats hold the presidency also, with Joe Biden halfway through his first term).
Stocks historically soar following midterms, with the S&P rising 15% in the 12 months after midterms since 1950, according to John Lynch, chief investment officer at Comerica Wealth Management.
Republicans breaking up Democrats’ control in Congress would likely send historically high bond yields tumbling given the party’s historic commitment to less government spending, thus sending stocks up as well given the inverse relationship between bond yields and equity prices, Michael Wilson, Morgan Stanley’s chief investment officer, wrote in a Monday note.
The yield for a 10-year U.S. Treasury note was 4.22% Wednesday, near the highest level since 2007 and a whopping 270 basis-point increase from a year ago.
Midterms will be particularly impactful for sectors most impacted by legislation with support split closely on partisan lines, with cannabis stocks poised for a likely surge if Democrats keep their majority, while technology stocks would likely benefit from a strong performance from Republicans as it likely hinders any Democrat-led legislation targeting Silicon Valley.
Key Background
The party of the sitting president typically cedes seats in Congress during midterms Inflation has surged to its highest level in four decades since Biden took office in January 2021, though it’s in part due to several factors largely beyond Washington’s control, including surging global energy and food prices due to Russia’s ongoing invasion of Ukraine. Still, Biden’s handling of the economy has sent his approval rate spiraling. A recent UBS survey of 1,400 high net-worth individuals listed the economy and inflation as their primary focus for midterms , with a majority of respondents favoring Republican policies on those issues.
Crucial Quote
“Midterm elections have heralded positive stock market performances in the past and we expect to see an impressive rally this time too,” DeVere Group CEO Nigel Green wrote in a Monday note. “This stalemate, while often infuriating for voters, is often good news for stock markets…because a lack of sweeping legislative changes means there is less uncertainty for businesses.”
What To Watch For
Thursday’s release of October’s consumer price index, the most commonly cited inflation measure, will likely move markets significantly as well. Last month’s CPI reading sent the Dow up 800 points after coming in cooler than expected, while September’s high reading caused the Dow to have its worst performance of 2022.
Further Reading
What stock investors should watch for in the midterm elections, from cannabis to tech (Fortune)
Midterm elections could boost or hinder energy, tech stocks (Fox Business)
Source: https://www.forbes.com/sites/dereksaul/2022/11/07/dow-jumps-400-points-as-midterm-elections-set-stage-for-impressive-rally-heres-why-this-is-normally-a-good-time-for-the-market/