What happened
As of early Wednesday, the outcome of the midterm election remained unclear. Various projections indicate Republicans taking control of the House while the Senate remains too close to call.
Elections matter, but other factors matter more for the trajectory of markets and the economy
Investors need to look well beyond the political makeup to gauge markets’ risk/reward.
- Markets have notched solid gains amid a wide range of partisan control scenarios in Washington.
- Factors, such as the business cycle, monetary policy, and fundamentals will have a larger impact on the market’s near-term direction.
Market performance hasn’t been significantly different across a wide range of partisan control scenarios
We made a similar point around the 2020 Presidential election. Our view then was that progress towards COVID-19 vaccines and therapeutics would have a much greater impact on the economy and markets over the next year than the election. Indeed, a positive study on vaccines right after the elections spurred a large move higher in stocks. Furthermore, the economy back then was in the relatively early stages of a new business cycle, and monetary and fiscal policy was extremely stimulative.
Today’s backdrop is much different and, in our view, much more challenging. Markets have been weighed down by
- Surging inflation
- The most aggressive Federal Reserve (Fed) policy tightening in 40 years
- A large reset in interest rates and market valuations
- And rising recession risks
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Bar chart illustrates average annual S&P 500 returns under partisan control. R Senate/ D House/ R President – 13.7% D Senate/ R House/ D President – 13.6% R Congress/ D President – 13% R Congress/ R President – 12.9% D Congress/ D President – 9.8% D Congress/ R President – 4.9%