The Democrats won the House and the Republicans kept the Senate in the US midterm elections. The outcome was basically in line with expectations.
But would partisan politics in the US Congress present challenges for President Donald Trump in the remaining two years of his term of office and affect the stock markets negatively?
Let’s look at the stock market performances following the 24 midterm elections between 1922 and 2014.
According to statistics, the Dow Jones Industrial Average posted gains one year after the polls in 22 of these 24 midterm elections. The average gain was 13.9 percent. So the odds for the market to go up are fairly high.
This, I believe, has to do with the effect of the presidential election cycle.
US presidential elections are held every four years. Typically, the incumbent president and the ruling party would spare no effort in the third or fourth year of the cycle to boost the economy and their chances of winning a second term.
The year after the midterm elections usually overlaps with most of the third year of the presidential election cycle. That explains why the US stock market usually posts gains one year after the midterm elections.
However, the Trump administration may feel some constraints in the final two years of his first term after the midterm elections. Would this factor weigh on the market?
Statistically, the heightened partisanship increases the chances of having a weaker or more turbulent market.
The US stock market dropped seven times in the fourth year of the presidential election cycle after the midterm elections during the 1922-2014 period.
These declines mostly happened when the Democrats controlled the House while the Republicans controlled the Senate.
Given this trend, and amid the uncertainties resulting from the US-China trade war, investors should take caution, especially when the fourth year of the cycle starts in October 2019.
This article appeared in the Hong Kong Economic Journal on Nov 8
Translation by Julie Zhu
[Chinese version 中文版]
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