economy and politics

How do the mid-term elections impact the stock market?

First modification:

The agenda of President Joe Biden for the next two years depends on how the charges are in the United States Congress. If the Republicans, who have led the bets, win control of the House of Representatives, the Senate or both, it will usher in a divided government, which is usually more attractive to the market.

The financial markets, especially Wall Street, hardly tend to have large variations on the eve of elections in the United States. And the midterms that took place on Tuesday, November 8 were no exception.

The market is awaiting the final results of an election that could determine the future of Democratic President Joe Biden’s liberal agenda in the two years remaining in his term.

The future is not written as far as the stock market is concerned. However, statistics have given signs of how the stock market has behaved depending on which party dominates Congress.

According to an analysis by RBC Capital Markets, when a Democrat is in the White House, as is the case now, the market performs best when Republicans counterbalance one or both chambers.

This firm collects data since 1932 to analyze, for example, the behavior of the Standard & Poor’s index of the New York Stock Exchange according to the political dominance of the Legislature.

This index is a basket that brings together 500 of the largest companies by market value of a total of 6,000 listed on Wall Street and is often cited as the best thermometer of where the economy is going.

When there is a Democratic president, says the analysis, and Congress is divided, the statistics say that this index rises an average of 14% per year; but if it is controlled by Republicans, that performance drops one point. And if the Democrats have the legislative majority, that valuation is 10%.

This year, that index has fallen 20% in an atypical period in which inflation is at its highest level in 40 years and the Federal Reserve has had to face it with the most aggressive increase in interest rates in years.

Winners and losers by economic sectors

According to a Reuters analysis, the health sector would be more comfortable with a Republican Congress because Democratic initiatives to push for stricter policies on prescription drug prices would be curbed and that could support pharmaceutical and biotech stocks.

A Republican victory could also raise expectations for more defense spending and more favorable legislation for the fossil fuel industry.

The benefited sectors in the Stock Exchange according to partisan dominance.
The benefited sectors in the Stock Exchange according to partisan dominance. © France 24

Instead, a Democratic win could help clean energy and cannabis stocks, given expectations that the party is likely to favor more friendly legislation for those industries.

Morgan Stanley strategists wrote Monday that if Democrats hold onto a majority in Congress, they could boost Treasury yields and strengthen the dollar, as potentially higher fiscal spending could exacerbate inflation and force the Federal Reserve to raise rates higher than expected.

with Reuters

Midterm elections 2022: the results live
Midterm elections 2022: the results live © France 24

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