This year's US stock trend confirms the Wall Street adage "Don't fight against the FED". But with the midterm elections approaching, another adage is coming into play - "Don't fight Santa Claus after mid-term elections".
The midterm elections in the US will be held on November 8, which will in part influence the future direction of US policy.
- What is midterm election?
Midterm elections are held near the midpoint of a president's four-year term of office. People can elect their representatives and other subnational officeholders.
The party of the incumbent president tends to lose ground during midterm elections: Since World War II, the President's party has lost an average of 26 seats in the House, and an average of four seats in the Senate
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Analysts believe that there are three possible outcomes of the midterm elections
1. The Democrats (Joe Biden from Democratic party) control both the Senate and the House of Representatives. Voters approve of Biden's fiscal approach and FED may further tighten money, the end of interest rate hikes may be higher.
2. Democratic party control the Senate and the Republicans control the House. The bill to raise corporate taxes will be hindered.
3. Democrats lose both the Senate and the House and the Republicans control the Congress, which may lead to significant cuts in Biden's fiscal spending and pushing for tax cuts.
The latter 2 scenarios are the most likely and have both benefited equity investors in the past.
Comerica Wealth Management found, based on past data, that in both scenarios, the S&P 500 has risen between 5% and 14% annually.
History shows higher investment returns at the end of the year?
Historically, institutional investors tend to push the market higher in November and December. Midterm elections are usually a stress reliever for the bulls.
According to investment research firm CFRA,
the Q4 of midterm and the subsequent Q1 after midterm election are generally the two strongest quarters for US stock during a US presidential term (16 quarters in total). The S&P 500 records in average gains of up to 6.4% and 6.9%, respectively.
November has always been a strong month for US stocks. In 9 of the past 10 years, the S&P 500 has risen during the month.
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Opportunities in which sector against the midterm elections?
The impact of the US midterm elections on risk assets (especially US stocks) can be divided into two main areas.
The relevant economic policies proposed by the ruling party prior to the midterm elections.
The change in policy direction after the midterm elections, when the opposition party becomes the majority party in Congress.
The Biden administration may introduce or release more signals about economic policies in October-November in order to consolidate its position in the midterm elections.
Based on the Inflation Reduction Act, clean energy may become the focus of investment in the next phase
After the bill was passed, the US new energy generation sector rose 6.93% in one month against the backdrop of a general decline of stock market in August. As the midterm elections continue to advance, the policy of clean energy will bring long-term sustainable boost for clean energy companies.
Do you think the Santa rally will begin together with Midterm election?
Which company can you name that benefit from Inflation Reduction Act (IRA)?
Will Fed turn dovish in Midterm election?
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