Investors Polling for Split Government – GOP Sweep

Soon we can all stop blocking the incessant political text messages to our cell phones. Hopefully, the sun will come out tomorrow and Democracy will be sustained for yet another election cycle. To the questionable credit of the political machine having spent a record $16.7 billion to get out the vote and denigrate the other party, over 40 million early voting ballots have been cast. This may be a third of all voting. With consumer sentiment at record lows, 71% feeling the economy is headed in the wrong direction and over 80% stating the economy and inflation are the most alarming issues, it is not surprising that forecasts universally expect a Republican sweep of the House and possibly the Senate. Almost every midterm election has the party in power losing its majority. With this election being tied for the slimmest House majority of the party in power before the midterms since the 1950’s, it will not take much for a change of control. A narrow hold on power combined with one of the worst pre-election sentiment surveys in history is an extremely strong sign that a split Government is at hand.

Historically, investors prefer a divided political outcome. In every midterm election since 1950 the stock market has been higher one year later by almost 19%. Stock indices averaged a 34% gain after two years. With inflation at historic highs and a credit tightening effort into a cyclical recession due by the end of 2023, perhaps this will be the exception that breaks the rule. However, given the record of past market cycles, there is reason to be optimistic that all the bad news will be priced in before the end of next year. Over the near term there has already been a double-digit stock rally off the October lows that may be starting to factor in a split Government. A GOP victory in the House and Senate should shift expectations toward a cessation of party line spending legislation, thus lowering Bond yields. This may provide another boost to equity valuations before we run into trouble heading into the January/February earnings cycle.


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