THE midterm elections could reshape Congress as lawmakers grapple with persistent inflation, high energy prices and increase in budget debt. For investors, on the other hand, the political result could provide a boost.
Data from financial firm Edward Jones shows that the S&P 500 stock index rose an average of 1.7% in the month following the last 14 midterm elections, dating back to 1970. In the six months following the midterm elections, S&P returns averaged 15.5%.
“Volatility around voting is possible, but markets have historically performed well in the year following the midterm elections, as political uncertainty fades and attention returns to the economic outlook,” Magdalena Ocampo, market strategist at global investment firm Principal Asset Management, said in an email Tuesday as Americans were voting.
With control of Congress at stake, Wall Street analysts are also considering the impact divided government could have on stocks if Democrats win the House, Senate or both chambers. Political gridlock has historically been good for markets because it limits Congress’s ability to pass sweeping tax and spending laws, reducing the risk of volatility, analysts say.
“Less change makes the environment more predictable, which allows companies to invest in longer-term projects,” Chris Low, chief economist at FHN Financial, a capital markets firm, said Tuesday. “It tends to be good for revenue.”
However, less volatility in stock markets does not guarantee investors an easy journey. Gridlock in Washington, D.C., could also fuel a new partisan standoff over the national debt, which recently exceeded 40,000 billion dollarsor encourage the US government to increase its borrowing to finance its priorities, according to economists.
That could unsettle bond investors, who fear Washington is on an unsustainable fiscal path, Ed Yardeni, president of Yardeni Research, said in a note to investors.
“Prolonged shutdowns and budget impasses could push Treasury yields higher, weighing on stock valuations,” he said.
The Bipartisan Policy Center, a Washington-based think tank, estimates that the United States will hit the debt ceiling again sometime between late winter and mid-summer of 2027. At that point, lawmakers will have to decide whether to raise the debt ceiling, temporarily suspend it, or risk another government shutdown.
Volatility could also persist if President Trump continues to rely on his executive power to achieve his priorities, Yardeni said. In that case, Democrats would have little power to restrain Mr. Trump, even if they controlled Congress, he noted.
“Therefore, a blue wave could cause a cold shower for stocks, although we would view a selloff as a buying opportunity given the remarkable strength of the economy and corporate earnings,” Yardeni said.
A Democratic victory could have other implications for the economy beyond financial markets. That could include Democrats blocking Trump-appointed regulators, according to Jaret Seiberg, a financial policy analyst and managing director at investment bank TD Cowen.
“They (could) exploit that power to force the president into Democratic seats on independent agencies like the FDIC, the SEC and the CFTC,” he said.
A Democratic majority in the Senate would also elevate Sen. Elizabeth Warren, a Massachusetts Democrat, to head the Senate Banking Committee, giving her more leeway to pass populist legislation, Seiberg added. Warren would replace South Carolina Republican Sen. Tim Scott, who currently chairs the influential panel.
However, lawmakers will remain limited in their actions at the federal level, given the president’s right to veto legislation, UBS analysts say in a research note.
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