Economic Implications of Midterm Elections

By John Steele   |   December 12, 2018

Political Implications:

The most immediate impact of the midterm elections is that the Democrat-controlled House will serve as a check to the Republican-controlled Senate and President Trump, with legislative gridlock a likely outcome. In the aftermath of the elections, making individual tax cuts permanent (“Tax Cuts 2.0”) and overhauling the Affordable Care Act become increasingly unlikely. The elections’ resulting impact on hot button issues such as immigration, healthcare and infrastructure spending remains unclear. A Democrat-controlled House may result in further political investigations, though Democratic leadership appears wary to pursue impeachment proceedings against President Trump, particularly given that impeachment would require a two-thirds Senate vote for removal from office.

Market Implications:

While Democrats fared worse than anticipated in Senate races, election results were generally in-line with prognostications. Equity markets reacted positively to the results, gaining nearly 1 percent in early Wednesday trading. From a historical perspective, U.S. stocks (S&P 500 Index) have typically performed well in the year following midterm elections, regardless of the party in control of Congress.

The evidence suggests no clear relation between partisan control of Congress and the performance of the S&P 500.

Source: Dow Jones Market Data / Barron’s

…and U.S. stocks (S&P 500 Index) have historically thrived under political gridlock:

Final Conclusion

While the historical data shows that U.S. stocks have fared well in both the year following midterm elections as well as during periods of political gridlock, we would strongly caution investors against making reactive, tactical allocation changes in light of strong historical U.S. stock performance. It bears noting that U.S. stocks have already enjoyed an extended period of significant gains, with the S&P 500 Index having annualized at 11.9% over the past 10 years, through 09/30/18, which has sharply outpaced non-U.S. markets over that same period (MSCI EAFE 5.9% annualized, MSCI Emerging Markets 5.8% annualized). We continue to emphasize that investors should adhere to a well-constructed, diversified investment portfolio anchored to long-term goals, risk tolerance and time horizon.


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John Steele

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