With US midterms only four months away, Washington has started to spiral as Democrats and Republicans jostle for control of both the Senate and the House of Representatives.
The outcomes could have wide consequences not only for US politics but also for the US market, as control will dictate what policies the Trump administration can push through.
Yet, despite the volatility of the midterm elections, the slate of races could create strong conditions for investors, argued Jeff Buchbinder, chief equity strategist at LPL Financial.
“History suggests investors may be better served focusing on market behavior rather than political predictions,” Buchbinder wrote.
Midterm years historically correlate with the weakest annual equity performance of the four-year presidential cycle, with growth averaging only 4.6% while stocks generate the largest average drawdowns and highest realized volatility, Buchbinder wrote.
However, the 12 months after the midterms, the “pre-election year,” show the highest annual growth, setting up strong prospects for investors. Going back to 1954, the S&P 500 (^GSPC) has risen in every one of the last 18 post-midterm periods, averaging a return of 18.2%.
“The pattern reflects a common market tendency: uncertainty peaks ahead of the election and begins to fade once the outcome becomes known,” Buchbinder wrote.
“Investors gain greater clarity on the policy landscape, allowing attention to shift back toward fundamentals, such as economic growth, earnings, and monetary policy,” he added.
LPL Financial’s base case is a split Congress, a shift in power from the Republican Party’s current control over both the upper and lower chambers. A divided congressional body would be likely to create an environment where “investors should expect fewer large legislative changes and more volatility around key issues like government funding and the debt ceiling,” he said.
With major bills harder to pass, the focus will turn toward what the White House can accomplish through executive order and the regulatory agencies, as Democrats in control of either chamber would be likely to block any major legislative attempts.
That said, market outcomes matter more than political outcomes, Buchbinder argued. For those willing to deploy capital when uncertainty is highest, he wrote, that risk often bears a strong return.
“While midterm years may test investors’ patience, they may reward discipline,” Buchbinder wrote. “Rather than attempting to predict election winners, investors may benefit more from preparing for the volatility that accompanies the process — and remaining ready to lean into opportunities once the uncertainty begins to clear.”
