Historically, midterm elections have proven to be turning points for the stock market. In fact, in every 12-month period post a midterm election since 1946, the S&P 500 Index has shown positive returns. This positive change may have less to do with who the winners and losers were and more about removing a source of uncertainty within the market.
As of this writing, the outcome of all the races in the House of Representatives (House) and Senate is unknown. It would appear there will be a shift in the majority of at least the House to the Republicans from the Democrats. The Senate remains too close to call, with two states still counting votes and a race in Georgia that is going to a run-off on Dec. 6.
This week’s chart shows the average rates of return based on the party that holds power in the White House, the Senate, and the House. The light blue bar is where we are now, with the Democrats controlling all three. If the Republicans take the House with the Democrats keeping the Senate, we move to the second bar from the left. If the Republicans get the House and Senate, we move to the third bar from the left. In either case, average returns for the S&P 500 Index are higher. History shows that a split government provides an environment where stock market returns are higher.
Regardless of the outcome, we are still dealing with a Fed raising rates as inflation remains too high. We saw a significant rally after releasing a Consumer Price Index (CPI) number lower than expected. Still, annual inflation of 7.7% will keep the Fed on track to raise rates another 0.50% in December, and measures of inflation and the labor market will determine how much higher interest rates will go.