Midterm Elections Preview
Tomorrow is the midterm elections, and investors wonder what consequences might come along with the big day. There are generally three outcomes that could arise out of the midterms.
Divided government. Republicans take control of the House, Democrats retain control of the Senate: This outcome is likely to be the least consequential for markets because it epitomizes the checks and balances system. A divided government means that major legislative packages aimed at higher taxes for individuals or corporations would likely be off the table for at least the next two years.
Divided government. Republicans take control of both the House and Senate: If Republicans secure a majority in both chambers of Congress, many of the key items on the Democratic legislative agenda would likely not be able to make it through Congress. This means that tax increases, legislation on tech companies, fossil fuel regulations, and further bills on climate or the environment will likely all be off the table for the foreseeable future.
Democratic sweep. Democrats hold on to their current majority in Congress: A Democratic sweep could create more volatility in markets, leading to potentially higher taxes or a stricter regulatory environment for businesses. Another two years of Democratic control of Congress could also bring heightened concerns for health care or big tech, which have been under increased regulatory scrutiny.
What could these outcomes mean for investments?
The only thing that is granted about elections is that they add uncertainty to the investment outlook. Despite adding a degree of uncertainty, past experiences show that midterm elections tend to have a relatively muted impact on equity markets. The S&P 500 has a tendency to move higher after the political uncertainty declines in the aftermath of midterms.
As concerns around market volatility rise, we would encourage investors to stay invested and focus on their long-term goals. We are focused on portfolio positioning that may provide a buffer in the event of an economic slowdown. While the Fed continues with its hiking cycle, and more market swings are expected, we would encourage investors to look out for compelling entry points, particularly on sectors that are already set to benefit from the $370 billion in spending from the Inflation Reduction Act, namely clean energy, defense and select industrials.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
