What Current Midterm Election Results Could Mean For The Stock Market

Historically speaking, the period around U.S. midterm elections can be a positive for stocks. That may be because the midterms often move U.S. politics from one party holding power, to shared power and smaller majorities. Typically less legislation is passed as a result. The 2022 election could prove to be similar as the Democrats held the Presidency, House and Senate going into the midterms. We’re awaiting final counts in various key races in both the House and Senate, and may not know the outcome of the Senate until an expected Georgia runoff election on December 6.

Gridlock?

It’s likely, on current estimates, that Republicans are slight favorites to gain control of the House, though that race has not been called at the time of writing. That would be enough for the gridlock that the market typically favors. Less can get done when powered is shared, and the markets have historically preferred that sort of predictability.

The Senate

The outcome for the Senate is even less clear, but if the Republicans take the House that’s enough to enable gridlock regardless of the Senate outcome.

Also, whatever the outcome, majorities will be slim for either party in both the House and Senate, again suggesting less legislative activity. We may not know the outcome of the Senate until a Georgia runoff on December 6, leaving U.S. politics in limbo for a while longer.

Of course, there is still a possibility that the Democrats could retain both the House and Senate, that would mean that the U.S. political process is not in gridlock, and markets may view that as a risk. Historically the markets haven’t had too much bias to which party is in power, but gridlock appears to be a better outcome for the stock market.

The Economy

That said, in the current economic environment, market swings are likely to be driven to a great extent by the actions of the U.S. Federal Reserve and associated data on inflation, the housing market and unemployment as the state of U.S. politics. Politics will always be a factor for markets, but the U.S. and global economy is likely to dominate how the market trades over the coming month.

Sector-Level Trends

Politics can also matter at the sector level of markets. Republicans have signaled focus on U.S. energy independence, and so, to the extent Republicans gain political influence after the midterms, that may favor the energy industry, to the extent access to drilling permits is loosened and talk of additional taxation on the sector diminishes.

Cannabis

Cannabis, although relatively small, has been a particularly volatile market sector in 2022. Here, the midterm elections showed support for legalizing cannabis in Maryland and Missouri. President Biden and Senator Schumer have both signaled intent take steps on cannabis legislati0n and scheduling in the coming months. On the other hand, votes in Akansas, North Dakota and South Dakota voted down state-level legalization measures. Still cannabis-related legislation, or the lack of it, will very likely drive those stocks in 2023.

However, it is also worth noting that many hot political topics are likely to have a less direct impact on financial markets. Issues such as the immigration and abortion, though important to many voters are likely to have a less direct impact on stocks.

Also, even though the midterms are largely complete it may take some time to know the full outcome, if there is a Georgia runoff, the outcome of that won’t be known until December 6 and that will determine final margins in the Senate. So the markets may have to wait to know the full outcome of the midterms.