The mid-term elections in the USA are just a short distance away, a very important political event held two years after the presidential elections. The appointment is next November 8, a test bed to verify the approval of American citizens on the work of the White House. The vote goes to renew the composition of the House of Representatives and, for a third, also of the Senate.
They have rarely been in favor of the president’s party but that could change before the Americans go to the polls on November 8. In view of this, George Brown, Economist of Schroders identified three possible outcomes of the mid-term elections and the possible reactions of the market.
Midterm: the three scenarios and their impacts
Il primo scenario is that of a divided congress, and among other things it is the most probable. Republicans are given an 80% chance of taking over the House of Representatives, while in the Senate, Democrats have a 60% chance of retaining control. From a legislative point of view, this situation is problematic ..
From a markets perspective, however, a stalemate on Capitol Hill would favor risk assets. “Being forced to compromise serves to moderate the most extreme inclinations of each party, offering investors a more stable political scenario”, says the expert.
Il according to scenery see i Republicans conquer the House and Senate. This is less likely than the first, since – although all 435 seats in the House are contested – only 35 of the 100 Senate seats are up for grabs.
Apparent control of Congress, Brown continues, would not allow them to pass biased bills, which would be vetoed by the President, whose decision can only be overridden by a two-thirds “super majority” in both houses.
In this scenario, little should be expected at the legislative level, which should support the actions. But Republicans could also take a tougher approach to controlling fiscal discipline. This could result in a showdown similar to that of 2011, when Biden (then vice president) had to strike a last-minute deal with Republican leaders to avoid a U.S. default, resulting in the first downgrade of the states credit rating. United: A combination that caused the S&P 500 index to drop by nearly 20%.
Finally the third scenery see i Democrats cling to the status quo, maintaining the triad, the Presidency, the House of Representatives and the Senate. Democrats would be encouraged to carry on the president’s program. And while broader risk sentiment could benefit from a looser fiscal stance, investors should consider the possible implications for monetary policy.
However, this will largely depend on the degree of success the Democrats can achieve. The Party has found it difficult to fully realize the president’s ambitions, given his current weak grip on the House and Senate. This was especially the case in the latter, where centrist Democrats Joe Manchin and Kyrsten Sinema resisted some of the more liberal reforms. Unless the party manages to win more seats in both houses, it will continue to face the same challenges of the last two years.
The effects on the markets
For the midtermas mentioned, the optimal outcome from an equity perspective would be one in which the deadlock prevails on Capitol Hill. But historically, stocks have performed well regardless of the composition of Congress. A determining factor for sentiment over the next couple of years will be the extent to which the Federal Reserve will have to raise interest rates to contain inflation. And this will partly depend on which party, if any, wins the mid-term elections.
The midterm they will also serve as a litmus test for Donald Trump’s chances of regaining the White House. While he hasn’t explicitly confirmed that he will run in 2024, he has a 25% chance of winning, according to betting site Betfair. During his presidency, the markets had a rough four years, characterized by geopolitical tensions and repeated attacks on the Fed. In the end, however, the S&P 500 posted an impressive 13.7% annualized return over the period.
It remains to be seen what the outcome will be, with a game still open. But in the end, a poor mid-term election result for both parties will translate into a good result for investors, concludes the expert.