Markets have bigger worries than US midterm election results
- Investors are far more concerned about inflation, further monetary policy tightening and recession risks
- In a way, a gridlocked government would remove uncertainty over new regulations and taxes, and make further stimulus less likely
The shifting of the global political landscape continues as the United States prepares to hold midterm elections on November 8. The elections will determine the controlling party in Congress, the legislative branch of government, which is made up of the House of Representatives and the Senate.
The outcome is crucial since, by and large, it determines the direction of fiscal and other major government policies, and the ease with which they are signed into law.
The House decides which laws are voted on and is made up of 435 elected members, divided among the 50 states in proportion to the population. All 435 seats are up for election this time, with the Democrats currently holding a slight majority.
Meanwhile, the Senate is composed of 100 senators, two for each state. It has the power to confirm those presidential appointments that need consent, and to provide advice and consent to ratify treaties. If there is a 50-50 party split, the vice-president has the tiebreaking vote on items that require only a simple majority.
Typically, big swings happen in midterm election years. Since the second world war, the president’s party (Democrats at the moment) has lost House seats in 17 of 19 midterm elections and Senate seats in 13 of 19. The average loss has been around 27 seats in the House and three to four seats in the Senate.
Recent polls suggest that the coming election could easily tip between a split Congress or an all-out Republican Senate and House. At the time of writing, polling website FiveThirtyEight’s forecast gives the Republicans an 81 per cent chance of securing control of the House, while the Democrats are slightly favoured to keep the Senate with a 55 per cent chance.
According to the latest poll conducted by Monmouth University, 82 per cent of respondents rated inflation as a critical issue and 68 per cent reported that jobs and employment were important. With energy prices dropping and housing rent growth decelerating, Biden’s popularity ratings could see some improvement.
If the midterms play out as predicted and we have a divided government, we are likely to experience political gridlock for the next two years. But this may also remove uncertainty surrounding new regulations and taxes as a split Congress is likely to produce fewer legislative changes.
The Republicans and Democrats have already compromised on infrastructure, semiconductors and technology, as well as defence spending in response to the Russia-Ukraine conflict. Even though both parties worked together on delivering a sizeable fiscal package during the Covid-19 recession, if the US does enter another recession, especially if it is a shallow and mild one, it is unlikely we will see further fiscal stimulus from a divided government.
Although markets have historically benefited after midterm elections as political uncertainty subsides, it is hard to isolate any impact to asset class volatility solely triggered by the elections in the current macroeconomic environment, especially as they come between the November 1-2 Federal Reserve meeting and the November 10 inflation data release.
While the outcome of the midterms may hold long-term implications for policy-sensitive sectors such as renewable energy and healthcare, they appear to rank relatively low on the list of macroeconomic factors concerning investors, with markets primarily focusing on inflation, the tightening of monetary policy and recession risks.
These factors, which have set the tone for markets over the past year, are likely to continue to be the driving force in the short term.
Marcella Chow is a global market strategist at J.P. Morgan Asset Management