The midterm elections are usually good news for investors, but with recession looming, it may take more than the political cycle to revive US markets.
- Over the past 18 political cycles, the S&P 500 has risen by an average of 15% in the 12 months following the midterm elections
- Markets appear to like the political balance that the midterms bring
- There is less optimism that markets will make progress in this political cycle
The US midterms usually usher in a period of stock market growth. Research from Oxford Economics shows that over the past 18 political cycles, the S&P 500 has risen by an average of 15% in the 12 months following the vote. As the final votes are counted in the 2022 election, should investors be turning back to the US?
The reasons for this post-election bounce aren’t totally clear, but the most coherent explanation is that they bring political stagnation. The midterms usually give the incumbent president a kick, with the opposition party seizing control of one or both of the House and the Senate. As such, it leaves the president unable to progress their legislative agenda. Given that markets hate change, this suits them pretty well.
There is less optimism that markets will make progress this time round. There is a difficult backdrop of rising interest rates, high inflation and a looming recession. Also, there is less uncertainty on the fiscal agenda of the government. President Biden has already got the two main parts of his legislative programme through – the Inflation Reduction Act in August and the Investment & Jobs Act last year. Any additional initiatives were likely to be piecemeal.
The key element in the market’s favour is valuations, which are considerably lower than a year ago. However, here too it is a mixed picture. Recent results from the country’s technology giants – Meta, Alphabet and Amazon – have been weak and there have been significant sell-offs. This demonstrated that markets had not yet adjusted to a changed outlook for these companies. On the other hand, disappointing results in other parts of the market – such as semiconductors – have had little effect on share price performance.
This suggests markets have adjusted in some parts of the markets, but in the fashionable, high growth technology companies, there may be some way to go on valuations. Either way, overall valuations may not be cheap enough to suggest a turnaround is near and they have a lot of bad news to process in the meantime.
At the time of writing, the outcome in the midterms is unclear. It has not been the emphatic victory the Republicans had expected, nor a ringing endorsement of Joe Biden’s presidency. In other words, it is exactly the type of political statis that markets like. However, this year, there may just be too much else going on.
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