US midterm elections have historically been followed by a strong period for stocks. The 12 months after the vote have often delivered above-average returns, in part because the following year is typically the third in the presidential cycle, which has generally been favorable for markets. The party in power may also seek to stimulate the economy ahead of the next presidential election while avoiding unpopular tax increases and regulation.
After the November 2018 midterms, when Democrats won control of the House of Representatives during Donald Trump’s first term, the S&P 500 rose nearly 12% over the following year.
This time, however, investors face several potential risks. Markets are concerned that Trump could launch a major attack on Iran after the election in an attempt to resolve the conflict militarily, despite his denial. Such a move could push oil prices higher and deepen inflation concerns.
The election could also bring short-term political uncertainty if it takes days to determine control of Congress. The Senate race is considered particularly close, and Trump could add to uncertainty by challenging the results.
A divided government is often viewed positively by markets because it can limit major policy changes and reduce political uncertainty, said Tim Murray, a capital markets strategist at T. Rowe Price. But he warned that a shift toward more progressive Democratic politicians could concern investors if they pursue wealth taxes or other redistribution measures.
Investors are also watching for the possibility of stronger regulation of the technology sector if Democrats regain the House and potentially the Senate. That could add pressure to the Nasdaq, which has already been unsteady. The oil and energy sector could face similar concerns.
At the state level, debate over AI infrastructure is another potential risk. Libby Cantrill, a US policy expert at PIMCO, said some candidates for governor are campaigning against data centers and calling for a complete moratorium. Whether such proposals will be adopted remains uncertain; data centers have drawn opposition in many places because of their high water and energy use.
German stocks were also lower on election day. By early afternoon, the DAX had narrowed its decline to 0.5%, at 25,850 points. The report cited renewed tensions in the Persian Gulf and a disappointing outlook from Apple as the main pressures on the index.
Sources: Tagesschau.