One of the most popular questions we’ve received lately is what could happen in the upcoming midterm election? Although we are a long way away from Election Day, it is important to note that a new president has historically lost about 30 House seats in the midterm election. With the Democrats holding a historically small majority in the House currently, a swing this size would of course give the Republicans control.
“Yes, history would say the Republicans likely gain control of the House and very well could gain the Senate as well,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Coming into midterms the party that lost the presidential election is usually more motivated party, gaining close to 30 House seats going back to Woodrow Wilson in 1914.”
How does this all play out for your investments? We do expect Republicans to take the House right now, resulting in something close to a gridlocked Congress. What happens if Republicans take both the House and Senate? “The good news is one of the best scenarios for stocks is a Democratic President and Republican-controlled Congress. In fact, the late 1990s saw that same scenario and it was one of the best times for investors ever,” added Detrick.
As seen in the LPL Chart of the Day, a Republican-controlled Congress with a Democratic President has been quite kind for investors.
One potential issue is President Biden’s low approval rating. With his current Gallup approval rating hovering near 40%, this extrapolates out to potentially losing 50 seats in the House. Thanks to our friends from Strategas Research Partners for help with this chart.
But let’s remember the election is a long way off still and a lot could still happen. However Congress shapes up, there will be many checks and balances in place so what either party can do may be limited to areas where there’s bipartisan agreement.
Here are two more important midterm charts. First up, midterm years have seen the largest intra-year pullbacks, down more than 17% on average, but the S&P 500 Index has gained more than 30% a year off those lows. In other words, don’t panic if we get some normal midterm volatility, it could be an opportunity for longer-term investors.
Lastly, early in a midterm year stocks historically are quite weak. It isn’t until the election is over and the uncertainty is alleviated until a rally typically takes place. Every year is different, but maybe the weakness early in 2022 shouldn’t be a big surprise.
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