4 Ways 2022 Midterms May Impact the Stock Market

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The impact of the U.S. midterm elections is sure to linger over the next few months and probably much longer. Election officials are still cementing the final vote tally – the Georgia race for Senate remains in play and could go to a runoff on Dec. 6 – but Congress is sure to look different through 2024.

© (Getty Images) Voting Booths set up in rows on Election Day

That, however, doesn’t seem to faze many U.S. investors who will largely stick to the plan.

According to data from the Hartford Funds Midterm Elections Survey, 73% of women don’t plan to make changes to their portfolios in light of the election, compared with 53% of men.

Additionally, 81% of baby boomers and 64% of Gen X (ages 42 to 57) investors don’t plan to make changes to their portfolios because of the midterms.

There are demographic exceptions, however: The Hartford reports that 75% of Gen Z (ages 18 to 25) investors and 65% of millennial investors do plan to make changes to their portfolios.

Here are four ways the U.S. midterm elections could affect the stock market, given the likely shift in power in at least one chamber of Congress, plus advice on how investors should respond:

  • Stocks more likely to rise after midterm elections.
  • Less spending on clean energy initiatives.
  • Specific sectors could profit.
  • Midterm elections may impact tax rates.
  • Should portfolios shift based on election results?

Stocks More Likely to Rise After Midterm Elections

While the ripple effect on stocks is difficult to predict with Senate seats still being contested, change is in the air as the Republicans are likely to claim a majority in the House of Representatives.

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Wall Street likes a “split bill” in Washington. Historically, the U.S. stock market treats a split Congress as a positive development, as investors, it seems, prefer stability over chaos, and that’s usually what a divided government provides.

Timing is an issue, too, as stocks tend to do better in the immediate aftermath of a midterm election no matter which party controls Congress. Also, the third year of a presidential term has historically been the strongest for the S&P 500 regardless of election outcomes, according to Morningstar data.

By and large, the S&P 500 has underperformed in the months leading up to a midterm election. Over the past 60 years, the S&P 500 has averaged a 0.3% return for investors in the year leading up to the midterm elections. However, the S&P 500 returned an average of 16.3% in the one-year period following the midterm elections over the same stretch, and most of those returns were generated within the first 90 days after a midterm election.

“This trend has happened regardless of what political party took the lead of the House and the Senate; therefore, statistics are definitely in favor of a positive effect of midterm elections for the market,” says Guido Petrelli, CEO of Merlin Investor, in West Palm Beach, Fla. “Still, this time the market may behave differently given historically high inflation, global geopolitical tensions and the lingering pandemic.”

Yet, given how much the market has struggled in the past several months, “the overall outcome could continue to be on the positive side,” Petrelli says.

Less Spending on Clean Energy Initiatives

Republicans have historically opposed Democrats when it comes to spending on green energy, and that has ramifications for climate change funding.

“We expect to see much less spending on green initiatives and more theoretical technologies,” says Aaron Rafferty, CEO of BattlePacs, a voter engagement platform in Sheridan, Wyoming.

As far as the recently passed Inflation Reduction Act and the clean energy subsidies attached to that legislation are concerned, many analysts don’t see those policies going away anytime soon, as efforts to backtrack on the landmark climate change law could face stiff opposition and may be unpopular with industries that stand to benefit. However, a Republican majority in Congress could make the Biden administration’s path on climate issues somewhat muddier.

Specific Sectors Could Profit

One strategy that could benefit from the outcome of the midterm elections is focusing acutely on select stock market sectors.

“Depending on the final midterm results, there may be some sectors that will benefit more from the appointment of one party rather than the other,” Petrelli says. “Democrats could deliver a booster for sectors such as cannabis and clean energy, while sectors like oil and gas and health care would probably benefit from a Republican victory in Congress.”

“Given a Republican House, we should also see some weight lifted off the financial sector in favor of more heavyweight giants like BlackRock and J.P. Morgan and away from more consumer-related services like Robinhood,” says Rafferty.

Not every sector is likely to be swayed by a shift in political power, though. “Both political parties also seem to have a common understanding on some sectors, such as defense and infrastructure,” Petrelli adds.

Midterm Elections May Impact Tax Rates

The prospects for significant tax legislation that could impact the financial markets beyond this year are almost entirely dependent on election outcomes.

“We know that neither party wants a government shutdown in December, so there must be a moving bill that addresses government funding,” says John Gimigliano, principal-in-charge of the Federal Legislative and Regulatory Services group of KPMG U.S. in Washington, D.C.

While Americans will have to wait and see what actually makes it through congressional negotiations, KPMG anticipates four big interrelated tax extenders to dominate the tax legislation discussions: the research and expenditures, or R&E, expensing rule; the interest deductibility provision; extension of the enhanced child tax credit; and bonus depreciation.

Additionally, the Organization for Economic Co-operation and Development (OECD) deal that would mandate a minimum 15% global corporate tax rate in 2023 will be on the legislative table, which could have a significant impact on U.S. stocks.

“If we’re left with a divided Congress, the asking price Republicans will put on the table in order to agree to the OECD deal will be very steep,” says Jen Acuña, principal of Federal Legislative and Regulatory Services at KPMG. “There will have to be a really compelling Republican ask in a bill to get them to swallow that bitter pill – perhaps individual tax cuts and more.”

“Still, it’s hard to see a realistic scenario where there would be bipartisan support of the current global deal as it stands, at least in the short term,” Acuña adds.

Should Portfolios Shift Based on Election Results?

Should Main Street investors shift their investment strategy based on the outcome of a midterm election? Not really, investment experts say.

“History tells us that markets don’t care who runs Congress, whether the results favor the Democrats, the Republicans or even when they’re mixed,” says Kelly Klingaman, founder of Kelly Klingaman Financial Planning, in Austin, Texas. “Because of the historical long-term growth of markets, Main Street investors are better served by staying disciplined with their investment strategy and tuning out the noise of fear and greed in the meantime.”

That seems to be the consensus no matter what happens with election results over the next few weeks, including the Senate runoff in Georgia.

“Even if Republicans take both chambers, in the Senate the majority will be very limited,” Petrelli adds. Investors are best served by not making any drastic portfolio moves on the basis of the 2022 midterms alone.

Copyright 2022 U.S. News & World Report

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