Will the Midterm Elections Affect the Stock Market Negatively?

The stock market has been in freefall, and people's portfolios are taking a beating. With the midterm election right around the corner, things are looking pretty volatile. The Democrats might lose their majority in Congress, which would have implications for people's battered portfolios.

A Tight Race

Democrats are holding onto an edge in the Senate race, while Republicans are expected to take the House. If the Democrats manage to hold onto the Senate, the United States will again have a divided government. With the two sides of Congress canceling each other out at almost every turn, investors may not have to worry about the Democrats' tax and spending initiatives.

“If you look at the combination of a Democratic president and either a Republican-led or split leadership Congress, that has been one of the best environments for stocks over time. We also know that investors intuitively like gridlock,” RBC Capital Markets strategist Lori Calvasina told Yahoo Finance Live. “What I hear from investors is that they worry that some of the Democratic initiatives that have been on the table in the past that haven't gone through would end up adding to the inflation problem.”

From this standpoint, the Democrats' loss could potentially be the market's gain. There will still be a significant amount of turbulence thanks to the uncertainty of election results. On November 2, the Federal Reserve will be having a meeting about interest rates, which could have an adverse effect on the market as well.

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Run the Numbers

All 435 House seats and 35/100 of the Senate seats are up for grabs this election season. 36/50 states will also be electing governors this year.

Since 1942, the median equity market returns in the first three-quarters of midterm election years have been -1%, 2%, and 5%. 4th quarter returns generally jump to 8%.

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Wall Street Weighs In

Several banks and financial service companies have weighed in with their opinions about the midterms and what effect they will have on the already fragile market this year.

“But irrespective of the result, there’s a consistent market signal in all 19 midterm elections since WWII: The S&P 500 has ALWAYS been higher exactly a year after the vote.” — Deutsche Bank

“Our analysis shows that the health of the economy is a much more important factor than midterm election results.” — U.S. Bank

“The higher cost of living and an aggressive rate tightening cycle complicates the voting picture. A lot will depend on voter turnout on the day.” — Jefferies

“There are myriad unknowns heading into this period, not the least of which is how the midterms will impact the legislating calculus, but we expect movement on the annual defense bill, a federal funding package that could become a Christmas tree carrying numerous ornaments, and possibly a targeted tax bill.” — BTIG

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