Democrats and Republicans aren’t the only ones with their eyes on the midterm elections.
Analysts and market forecasters are also keeping a close eye on the elections. Given that policy, tax reform and infrastructure could all change, November could cause a rise in market volatility.
With so much uncertainty about the outcome of the midterms, even experts can’t be sure of if, or how, these changes will impact the market.
If history is any indicator, this is traditionally the most favorable part of the four-year presidential cycle because incumbents will boost their efforts to strength the economy ahead of the next election. With that in mind, stocks and the market could potentially rebound from any weakness created by the elections.
Despite that reassurance, John Lynch, chief investment strategist at LPL Financial notes how different this election will be from previous elections.
“It’s difficult to say whether we can apply this history to upcoming elections,” he said. “The upcoming midterm elections promise to be among the more interesting in recent decades.”
Lynch outlines political power and its impact on the economy:
Democratic President + Republican Congress – “This has been the best combination for the S&P 500,” says Lynch, “followed closely by a democratic president and a split congress.”
Republican President + Split Congress – Lynch calls this possibility “a reasonable prediction for the outcome this November, adding that in the past, this combination “has also been a good environment for stocks historically.”
Republican President + Democratic Congress – While this combination is unlikely to happen in November, Lynch says it’s not favored by market watchers because it “has produced the weakest average returns.”
On The Fence
These three policies stand the most chance to change depending on the outcome of the midterms.
Taxes – The House and Senate are held by Republicans, if that continues as a result of the midterms, it’s possible they will continue their efforts to make the tax cuts passed last December permanent. If Democrats were to take control of one or both of the chambers, they may try to alleviate pressure off of the debt ceiling by instead increasing taxes.
Infrastructure – “This is an area many thought President Trump and the Democrats could work together on,” Lynch said. “That proved more difficult than expected in the initial attempt last year and nothing was done.” Lynch expects that if the Democrats do win the House, they may repeal parts of the corporate tax cuts to fund infrastructure spending and again alleviate pressure from the debt ceiling. Another possible funding option the Democrats could explore is a carbon tax. If infrastructure spending increases, there could be a boost to construction and building material stocks.
Healthcare – Democrats could play a large role in market movements regarding healthcare. A steady push nationally and at the state level to expand Medicaid would benefit health insurers and hospitals, Lynch points out, but Democrats might also intensify their efforts to control drug costs, which could impact the pharmaceutical industry.
What The Market Wants
Depending on the outcome, politicians on both sides of the aisle will be able to build legislation to suit their agenda, but what does the stock market want from those in Washington D.C.?
Since change, especially a sudden turn of the tide, could rock the market in either direction, the status quo is a safe spot for market watchers. So, gridlock is good.
“The stock market tends to like gridlock better because it takes away the extremes and does not disrupt the status quo,” said Lynch. “So, maybe stocks would prefer a Democratic-controlled House.”
On the issue of taxes, Lynch said, “Stocks seem to like tax reform.”
Despite the notion that anything could happen, Lynch seems optimistic about the midterms and the remainder of 2018 for the stock market.
“Though we may see market volatility ahead of the results due to the policy uncertainty,” he said. “We would expect the political calendar to provide a tailwind for stocks over the coming months.”
AdvisorNews Managing Editor Cassie Miller may be reached at firstname.lastname@example.org. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.
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