Mid-Term US Elections and Markets

Mid-Term US Elections and Markets

Markets across all asset classes reflect the economic and political landscapes. Meanwhile, economics and politics are not mutually exclusive, as financial conditions can lead to political change, and political agendas can impact economic trends.

With the US mid-term elections only weeks away, voters will determine the majorities in the US House of Representatives and the Senate. The election’s outcome will determine if the current administration has the support necessary to support its agenda. Over the past two years, slim majorities in the legislative bodies have favored the administration. However, that could change in early 2023 if voters decide to hand the House and Senate control to the opposition political party.

The US mid-term elections come at a time with a divided electorate along political lines. The most recent 2020 presidential contest saw the largest turnout in history, with each candidate receiving more votes than any other in US history. The result gave the administration an advantage in the House of Representatives and a marginal majority in the Senate, with the Vice President as the deciding vote in a fifty-fifty split between the parties. Control rode the victor’s coattails in 2022.

Meanwhile, mid-term elections historically favor the opposition party, paving the way for the next Presidential election. The bottom line is the 2022 mid-terms come at a time of great division in the US with unique economic and geopolitical challenges facing the world’s wealthiest country.

The 2020 election was controversial

• One sign of the controversy created by the 2020 election was the record turnout of 158.4 million voters.
• Both candidates received more votes than in any other US presidential contest.
• Democrat Joe Biden received 51.3% of the popular vote, and Republican incumbent Donald Trump received 46.9%.
• Amid controversy, the electoral college certified President Biden’s victory in January 2021.
• The 2020 election will go down in history as one of the most controversial contests.
• President Biden’s party won a majority in the House of Representatives and a 50-50 split in the Senate.
• The Vice President is the deciding vote in the case of a Senate split.

Massive candidate spending in 2022

• Members of the House of Representatives stand for election every two years.
• US Senators serve six-year terms.
• The 2022 mid-terms will determine the majority in the House and support for the future of President Biden’s agenda.
• Thirty-four Senate seats of 100 are up for grabs during the 2022 mid-terms.
• Candidates are spending record amounts in the mid-terms.

The polls indicate a coin toss for control of the Senate

• Republicans are currently favored to win control of the House of Representatives in two polls, FiveThirtyEight and The Cook Political Report.
• FiveThirtyEight polls slightly favor Democrats to keep control of the Senate. The Cook Political Report highlights three toss-up states, Arizona, Georgia, and Nevada, that will determine which party has a majority in the Senate.
• A change in majorities in both the House and Senate will likely increase tensions between the executive and legislative branches.

Election years can cause market volatility

• Elections determine the path of domestic and international public policy.
• Inflation is at its highest level in four decades. The August CPI report reflected inflation far above the Fed’s target rate, leading to more rate hikes.
• The war in Europe continues, posing supply-side economic issues.
• Markets reflect the economic and geopolitical landscapes.

Lame duck agenda or a continuation of the same direction could dictate the path of least resistance for markets

• The mid-term elections could determine the leading administration policy initiatives, including climate change, social policy welfare, economic policies, the future composition of the judicial branch, and international policy.
• Republican control of the House, and potentially the Senate, could make the administration a “lame duck” until the 2024 presidential election.
• Elections have market consequences. In the US, divided along political party lines, the implications of the 2022 mid-term could be significant.
• Expect lots of volatility in markets across all asset classes going into the mid-term elections and in the aftermath.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!