What The 2022 Midterms Mean For The Markets

The markets often like political gridlock. The 2022 midterm elections have delivered it. The Republicans now will control the House, while the Democrats will hold the Senate and the presidency. It’s likely less work will get done as opposing parties share power. Still, the debt ceiling debate and other topics from cannabis legalization to student loans could impact markets and the broader economy.

Gridlock As A Boost To Markets

Research suggests that the stock market can have a good run around midterm elections. We’re maybe seeing some of that already with markets up from late September lows. This is believed to be simply that less gets done when power is shared and the markets favor that sort of stability.

The Fed Still Matters

However, as much as politics is important, it’s hard to believe that the markets won’t be more overshadowed by the Fed’s 2023 meeting schedule to set interest rates than political news.

The Debt Ceiling As A Risk

One issue with power sharing is raising debt ceiling just became a lot more complex. The debt ceiling should need to be raised in 2023, if not before. This could be a risk for financial markets, if not done in an orderly fashion.

It is a point of leverage for Republicans, who will control the House from January, as they can likely block an attempt to raise the debt ceiling. Even Joe Manchin, a Democratic Senator would apparently like to see budget cuts before the debt ceiling is raised.

2011 Risks

2011 shows the risk here, that too happened after midterms lead to gridlock. The summer 2011 debt ceiling debate lead to brinkmanship, U.S. debt was downgraded and markets fell over 10%. However, the debt ceiling has been raised many times since 2011, with far less disruption.

Other Policies

It remains to be seen which other policies will impact markets before the next round of elections in 2024. Cannabis remains a much discussed legislative topic and it’s likely the President can take action there without House approval if he choses to.

Student Loans

Student loan forgiveness, after legal challenges to what the Education Secretary can legally do to forgive student loans, may be further at risk with Republican control of the House.

If student loans are not forgiven, that may weaken the U.S. consumer slightly and the resumption of student loan payments in January 2023 could be a slight drag on overall spending. However, President Biden is now considering a further freeze on student loan payments into 2023. That may offer some relief to the U.S. consumer.

Overall Impact

Political gridlock is generally positive for markets. However, the debt ceiling debate creates some risk. It’s likely less gets done, but if that includes a lack of progress on the debt ceiling, markets may soon get nervous. It’s also hard to believe that the actions of politicians in 2023 will do much to take the central focus of markets on Fed policy-markers.