The US midterms: Our perspective

We look at the impact on policy and the markets.

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Key takeaways

  • Though Republicans are still favored to narrowly win the House, the final result may not be known for weeks as states continue to count votes.
  • Democrats retained control of the Senate and could expand their majority with a runoff election in Georgia.
  • Generally speaking, the election cycle has not been the dominant theme for markets and there has not been a strong relationship between Election Day outcomes and market performance.
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Election Day has come and gone and the votes are still being counted. While Democrats have kept control of the Senate, exactly which party will control the House of Representatives is yet to be decided. In fact, it may take weeks before the final results are known.

However, while the outcome of the election will impact what legislation might stand a chance of getting through Congress in the coming years, both the present uncertainty and ultimate result may not have as big of an impact on markets in the longer term as you might expect.

Republicans favored to take the House, Democrats keep the Senate

All 435 seats in the US House of Representatives were up for election this year. Several election-desk projections suggest Republicans have a strong chance of winning control of the House, though with a very narrow majority. Regardless, it could be weeks before we know the final results.

Democrats have secured a 50-50 split in the Senate, after winning key races in Arizona and Nevada. With Vice President Kamala Harris as the tiebreaking vote, Democrats are in control of the upper chamber. In Georgia, neither incumbent Senator Raphael Warnock nor challenger Herschel Walker secured more than 50% of the vote, which means a runoff election will be held on December 6 to determine the winner. Winning in Georgia would give them an expanded 51-49 majority.

How will the outcome affect policy?

Should Republicans win control of the House, Alice Joe, a vice president on Fidelity’s Government Relations team, expects the party to use the chamber’s vast oversight powers to take a closer look at many Biden administration policies. Regulatory agencies will also face more scrutiny, and could be reined in from a more aggressive agenda. She also believes House Republicans are likely to try to pass bills focused on taxes, energy independence, strengthening the supply chain, and cracking down on illegal immigration and crime. These will be messaging bills that shape a Republican agenda leading to the 2024 presidential elections, with little chance of being enacted into law in the 118th Congress. In the Senate, Democrats will likely be focused on confirming Biden nominees, especially for judicial appointments that could last beyond the duration of the president’s term.

Even under divided government, there could still be opportunities for bipartisan cooperation. Joe points to the pending SECURE Act 2.0, which would implement reforms around retirement savings. Joe expects it to pass as part of a year-end spending bill sometime before the end of this year. “Retirement has always been bipartisan,” she says. Additionally, we could see agreement on less polarizing issues, such as defense spending, tax extenders, or certain health care provisions.

How might the outcome affect the market?

"If you're an investor, I would suggest that this shouldn't be something you focus on," says Denise Chisholm, director of quantitative market strategy at Fidelity Investments. "It's my belief that you shouldn't be making big changes in your portfolio because of the election."

Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of our clients who have a managed account, agrees. "Historically," says Malwal, "we haven't seen a strong relationship between Election Day outcomes and how markets perform from there on out. So we don't adjust our positioning based solely on election outcomes."

"The election cycle is usually not the dominant theme of the market," says Chisholm. "But the year following the midterm elections tends to be the year with the narrowest range of returns—whether or not there's a change in control." In analyzing how markets have performed across election cycles, Chisholm looked at historical data since 1950, tallying up the price returns for the 12-month periods between federal elections.

"Historically," says Chisholm, "we've seen the best average returns in the 12 months following the midterm elections. The worst average returns with the highest variability in outcomes historically have been in the 12 months preceding the midterm election. The returns are still positive, just not as high. So, in the past, what we've seen is the 12 months following the midterms have had the least amount of variance, and the least amount of downside."

Chisholm says this could be because the resolution of the uncertainty surrounding the election calms investors, but overall feels that markets are largely taking their cues from other developments. "The wide range of outcomes you see in the analysis highlights that it's probably not politics that are driving stock performance. This year, how markets react is likely going to be driven by inflation, or whether investors expect a recession or not, or by what the Federal Reserve does. Politics likely won't have much of an impact."

Adds Malwal, "When managing client accounts, the US business cycle is the primary driver of our investment decisions. That's because we believe the pace of US economic growth and the direction of corporate profits are much stronger drivers of stocks over the long run."

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