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One Day Out

It seems everything matters more on Wall Street these days…due to historically high inflation, each new inflation data point is parsed and reparsed; due to a historically hawkish Fed, every comment by a member of our central bank is scrutinized and scrutinized again, and due to recession worries, each quarterly earnings report is analyzed and reanalyzed. And then there is tomorrow’s election. All mid-terms matter, but given how divided Washington, DC is and how markets have historically performed once the mid-term votes are counted, this election might matter more.

As it concerns the former point and the current makeup of Congress, Democrats hold an eight-seat advantage in the House of Representatives (excluding three vacancies), while the US Senate is split 50/50 between the two parties (it is true two US Senators are Independents, but both caucus with the Democrats, while Vice President Kamala Harris, as President of the US Senate, has the sole power to cast a tie-breaking vote). Said differently, Republicans need to pick up just five House seats and a single Senate seat to take control of Congress and usher in an era of fully divided government.

As it concerns the latter point, going back to 1962, the S&P 500 has always been higher 12 months on from a mid-term election, producing an average return of 16.3% (see grid). As we take pen to paper, the online prediction market PredictIt shows the most likely outcome of Tuesday’s vote being the Republicans taking the House and the Senate. That is an outcome which, at least from the perspective of the markets, should be welcome as the S&P 500 has, going back to 1933, produced above-average returns when the balance of power in DC was divided. As to why markets seem to favor “gridlock,” many pundits put it down to policy certainty, as in nothing of significance is likely to get done when one party holds the White House and the other party Congress (or Congress is split between the two parties); as to why markets have historically rallied post-election day, many pundits put it down to simply getting through the uncertainty surrounding the vote.

We will dig into these issues and others, including how the election might impact the economy in 2023, this Friday, November 11th on a special post-election webinar with Steve Pavlick, Head of Policy at Renaissance Macro and an expert on all things political. Please join us by registering for the webinar here.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 2127-BCI-11/7/2022

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