In the coming days, voters across the country will decide which party controls the legislative branch of government and several gubernatorial seats.
No matter who is in power or gains power from the midterm elections, the result will sway investors and the stock market for weeks to come. In addition, rising cost of living and persistent inflation may accelerate depending on the volatility of the stock market’s reaction.
On November 8, the midterm elections will hold 35 Senate seats, 435 House seats, and 36 gubernatorial seats for voters.
Rising interest rates are also putting Americans on edge as fears of a recession grow. Although, from a historical perspective, markets have always been volatile, whether for better or worse, post-elections, the current vulnerability of the US economy may create some long-term effects.
A Simple Guide to Midterm Elections, How They Affect the Presidency and More
In recent weeks, the world’s most powerful CEOs have expressed concern about the current state of the economy and that continued high interest rates will push the country into recession. The most prominent businessmen to have issued this warning include Amazon’s Jeff Bezos, Tesla CEO Elon Musk, Goldman Sachs CEO David Solomon and JP Morgan CEO Jamie Dimon.
“These are very, very serious things that, I think, could push America and the world – I mean, Europe is already in recession – and they could put America in some sort of recession in six to nine months. From now on,” Dimon said during an interview earlier this month. Dimon also warned that the S&P 500 could lose up to 20% in the coming month.
Generally speaking, markets do not respond well to surprises or uncertainty. Stocks generally fluctuate before, during and after election day. Although rebounds usually occur, too much volatility can make it more difficult.
By definition, the United States is already in recession. The most widely used definition of recession is two straight quarters of decline in GDP. After declining 1.6% in the first quarter of 2022, US GDP fell at a 0.9% annual rate in the second quarter. However, since the midterm election in 1929, the recession has not begun during the president’s third year in office. To get an idea of how the outcome of the election will affect the stock market, we must evaluate the past mid-term elections.
How has the market historically been affected by the medium term?
Historically, the political party of an incumbent president has lost 13 seats in the House and nine times in the Senate in 15 midterm elections over the past six decades, according to CNC Financial Group. Historically, the market has mostly underperformed in the year leading up to the medium term, which would be in line with the current economic situation in the US. ,
In the most recent 2018 midterm, the stock market rallied after Democrats withdrew the House, while Republicans maintained a majority in the Senate. The Dow Jones Industrial Average climbed more than 250 points a day after the election, rising 1% overall, while the S&P 500 and Nasdaq also gained more than 1%. Generally, whether a party gains or retains control of the government is the most important indicator of how well the market will perform.
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For example, both Donald Trump and Joe Biden claimed election results years after the presidency that the S&P 500’s total return was about 24% in 2016 and 40% in 2020. Factors beyond the control of party affiliation will determine how the market will react.
Do stocks go up or down after mid-term elections?
Since 1946, market performance has increased by nearly 90%, or in 17 of the past 19 mid-terms, compared to the months following the election. However, the same result may not be guaranteed for the upcoming election as according to Charles Schwab, the market performance of 2022 is significantly worse than that of previous years.
“Post-election performance is often driven by the market’s expectation of increased government spending from a new Congress,” Schwab’s chief investment strategist Liz Ann Saunders said in a statement. “But additional funding is unlikely this year, given the historic levels of government spending and stimulus in response to the pandemic.”
In fact, all that money is a contributor to the 40-year high in inflation, and any new spending could exacerbate the issue.
“The combination of high inflation, the war in Ukraine and a lingering pandemic has already made this cycle unlike the former mid-term years,” Saunders added. “As with so many other forces at play in the market, I wouldn’t put much weight into historical mid-term performance.”
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Is the stock market closed on election day?
The New York Stock Exchange is open Monday through Friday from 9:30 a.m. to 4 p.m. and is closed on certain federal holidays. However, the stock market will remain open during regular hours on the election day, November 8.