US midterm elections and a possible shift in the balance of power in Congress could have a profound effect on the economy – and other important issues – going forward. Democrats currently control the House of Representatives by a 220-212 margin and the Senate thanks to Vice President Kamala Harris’ vote to break a 50-50 tie. This leaves many investors trying to estimate the potential impact on the financial markets.
Heading into Election Day, Republicans are currently expected to take control of the House of Representatives, while the Senate race is considered a toss-up according to polling firm FiveThirtyEight. A potential “red wave” of Republican victories could have a major impact on how much the Biden administration can hope to accomplish over the next two years, including the direction of the economy.
What consequences the midterm elections could have for investors
The stock market has had a tough 2023, but if recent midterm elections are any indication, some relief could be on the way. In 17 of the 19 midterm elections since 1946, stocks performed better in the six months after an election than in the six months before an election, according to data from Charles Schwab. However, that record could be tested this year as investors face the headwinds of high inflation, rising interest rates and a possible recession.
Here are five other areas where the midterm elections could impact the markets.
1. Taxes
If Democrats pull off an upset and retain control of both the House of Representatives and the Senate, it could allow them to rethink efforts to raise taxes on high earners, capital gains or corporations. If Republicans control the House or Senate, tax increases would likely be off the table.
Tax increases would likely be viewed negatively by investors due to the potential negative impact on the economy and businesses. Otherwise, higher corporate tax rates mean lower market valuations.
2. Energy
Overall, Democrats have focused more on the impact of climate change and have increased support for policies that limit carbon emissions. If Republicans gain control of Congress, they could try to encourage greater oil and gas production. This could boost energy companies involved in exploration and production, but it could also lower oil prices. Energy stocks could benefit from an increase in production, but this could be somewhat offset by lower energy prices.
However, if Democrats were to retain control of Congress, clean energy companies could further benefit from policies that encourage investments in renewable energy sources such as wind and solar power.
3. Defense expenditure
Defense spending is likely to rise regardless of who controls Congress after the midterm elections, but is likely to rise most significantly under Republican control, according to UBS Wealth Management.
As the war between Russia and Ukraine continues and tensions with China rise, there is bipartisan support for an increase in defense spending. This could be a boon for certain defense stocks.
4. Cannabis policy
Democrats are more likely to support policies that would further expand the reach of the cannabis industry, so if Republicans gain control of the House of Representatives or the Senate, they could delay or limit new pro-cannabis legislation in the near future.
Cannabis advocates would like to see it legalized at the federal level, in part because it would make it easier for the cannabis industry to obtain financing from major banks. But that kind of legislation is unlikely if Republicans can win back both chambers, according to UBS.
(Consider whether these cannabis stocks and funds are right for your portfolio.)
5. Debt limit
Congress’ decision to raise the debt limit has been controversial at times in recent years. As a new deadline approaches and Congress hesitates to raise the limit, financial markets can be volatile at times, although an agreement often seems to be reached at the last minute to avoid a real crisis.
Republicans gaining control of either chamber of Congress could make it more likely that another standoff over the debt limit will occur, while Democratic action would likely make raising the debt limit a non-issue further down the agenda can be set for next time. two years.
In short
While much attention will be paid to the outcome of the midterm elections, long-term investors should not make drastic changes to their portfolios as a result. While some industries may benefit more or suffer more harm than others because of who controls Congress, predicting investment winners based on election results is not always as easy as it seems.
Most investors should stick to their long-term plans and remember that the stock market has risen about 10 percent per year over the long term, including periods when both Democrats and Republicans had control of Congress.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
