Today’s election could end with Republicans gaining control of the Senate and/or the House. If that were to happen, experts foresee that Washington D.C. will be gridlocked and little new legislation will get passed. How might this affect the stock market?
Ironically, gridlock is often thought to be bullish for stocks as it removes some policy uncertainty. A well-known fact is that Wall Street hates uncertainty.
“If Republicans do well and take back control of one or both chambers of Congress, we see the event as a positive for the stock market into year-end,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, wrote on Monday. “We believe the October move [in the S&P 500] was fueled in large part by the shift in momentum away from Democrats and back towards Republicans that we started to see in polling data and betting markets that was building in August and September.”
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, agrees that gains by Republicans would be bullish. But he also cautions that there could be some near-term volatility.
“The results may not be clear on Tuesday night given the delay in counting mail-in ballots, which means we can expect price volatility in equity markets will remain high and provide ammo for bears and bulls alike,” Wilson wrote on Monday.
Regardless of the outcome, Wall Street strategists are generally in agreement that the outlook for stocks is favorable once we get the midterm elections behind us. This would be in line with history, which shows the S&P 500 has generated a positive return in every one-year period that followed midterm elections. Indeed, post-midterm election periods tend to be stronger than average.
However, experts remind us that Wall Street does not operate in a vacuum and there are many factors to consider. “Our main mantra over the past decade is what happens in Washington matters, but collectively factors outside of Washington matter more,” Keith Lerner, chief market strategist at Truist Advisory Services.
“Market history suggests to us that regardless of which party is considered the victor in the midterm elections a rally of some kind is likely in the equity markets near term,” John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said. “A multiplicity of other factors including monetary policy, economic growth, corporate earnings and revenue growth as well cyclical (current) and secular (longer term) trends are likely to drive market performance to a larger degree into the New Year.”
