US midterms: what’s the impact for investors?

With more than 100 million Americans casting their vote yesterday, interactive investor asks whether this could be a historic buying opportunity for US shares.

With more than 100 million Americans casting their vote yesterday, interactive investor, the UK’s second-largest direct to consumer investment platform, examines whether this could present a historic buying opportunity for US equities. As ii explores, midterm elections often present ‘buy’ signals to investors, as there is a belief that the potential for political gridlock following the vote might benefit certain sectors and industries.

The impact on US markets is especially interesting to look at within the context of what has been a particularly volatile time for global markets, and following a series of technology stock sell-offs. The US market is home to many of the world’s largest technology companies.

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The US midterm election involves every seat in the lower chamber of the US House of Representatives and a third of seats in the Senate, as well as governorships in 36 states. The possibility of runoffs means the final outcome may not be clear for a few days.

As always, past performance is no guide to the future.

The historic US market rally following midterm elections

Interestingly, since the Second World War, the US benchmark has had a perfect record in the year following every midterm election. In fact, it has risen 19 out of 19 times and delivered an average increase of about 15% in the 12 months following midterms.

Lee Wild, Head of Equity Strategy, interactive investor, says: “The S&P 500 index’s perfect record that we have seen in the year after every midterm election since the Second World War unsurprisingly means many investors may be wondering whether we are approaching a “buy” signal as Americans head to the polls once again.

“From what we have seen historically, the winner of the presidency two years earlier tends to lose seats in a midterm election, resulting in political gridlock that prevents disruptive policy changes. In this specific case, therefore, we are likely to see the Republican party capture at least one Congressional house, which will have significant ramifications for President Joe Biden’s next two years in office. No doubt, therefore, investors will be watching carefully.”

There are no guarantees

Wild continues: “Nevertheless, and as with any investment – there are no guarantees. And equally, investing is very much a long-term game, which is something investors should always bear in mind. In fact, the prospect of further Federal Reserve monetary policy tightening which we have seen so much of this year means the usual post-election tailwind for US markets is far from guaranteed, threatening the post-war record.

“Facebook owner, Meta Platforms (NASDAQ:META), and Google parent, Alphabet (NASDAQ:GOOGL), for example - have both signalled disappointing earnings trends and US Treasury yields are giving recession warnings.”

How has the US market performed year-to-date?

In what has been a torrid year for markets, and not just in the US, the technology-heavy S&P 500 index is down 20% so far in 2022 following a quickfire round of bumper US interest rate rises.

However, the benchmark has rallied in the past fortnight in the run-up to the midterms.

Victoria Scholar, Head of Investment, interactive investor, explains: “We can see the market impact of these US midterms already. If the Republican party does indeed make strides in the election, that could make it harder to Biden to carry out fiscal stimulus measures, requiring less aggressive interest rate hikes from the Fed, in turn potentially dampening demand for the greenback.”

Political gridlock could be good news for some stocks - at least in the short-term

Wild continues: “We have already seen a number of US stocks beginning to benefit from investor positioning ahead of the midterms, including in the healthcare and biotech sectors, after valuations were earlier squeezed by Democrat legislation forcing lower prescription drug prices. Evidently, then, some investors believe the political gridlock that could be facing Biden if he loses the Houses could benefit key industries.

“Oil, too, is another industry that’s booming right now. This might seem at odds with a lot of the rhetoric around COP27 at the moment, and the urgency of the global climate emergency, so will probably surprise some. However, a Republican majority in the Houses may underpin oil stocks if it means more policies in favour of greater energy production. We won’t know just yet, but early indicators are there - Chevron Corp (NYSE:CVX) and Exxon Mobil Corp (NYSE:XOM), for example, are already up 55% and 79% this year.

“Nevertheless, if the Democrats perform better than expected, we might see the opposite impact, and there is more likely to be pressure on these gains and benefit clean energy stocks.”

Most-bought US stocks on ii YTD  (1 Jan 2022 – 8 November 2022 (real time))