US midterm elections will be held on Nov. 8. The Dems could lose their majority, paving the way for political gridlock in Washington. Historically, stock market performance in a midterm cycle year does not seem to influence the outcome at ballot box.
While no outcome is guaranteed, history has not been kind to the incumbent president's party, indicating that Republicans may be on the verge of winning back the House and perhaps the Senate, although the path to a majority in the upper chamber for the GOP looks more complicated., preventing the Biden’s administration from enacting his most ambitious plans that require legislation for implementation.
On average, stocks, as measured by the S&P 500 and Dow Jones, tend to be roughly flat in the last two months of the year in a midterm cycle after a, but then go on rallying about 12% the following year. There are only a few observations for this specific occurrence, so causality should not be assumed.
While drawing parallels and extrapolating circumstances can be a dangerous investment strategy considering that no two periods are ever entirely the same, a fragmented government could bring volatility toward the tail end of 2022. Should this scenario play out, equity market stability and a more durable recovery may not be achieved until 2023, when the new Congress shows its cards and it is time to start compromising to pass future legislation.
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