Midterms ought to bolster the stock market
With 2018’s primary season ending, midterm races are taking shape. So is the likely market impact.
Democrats will gain seats in the House of Representatives, maybe enough for control, while Republicans may gain slightly in the Senate.
The real winner for markets, though, will be gridlock, in which no major legislation gets passed. And that’s bullish for stocks.
Why gridlock? Because a decisive number of seats won’t swing to one party or another.
Democrats either win a tiny House majority or miss by a whisker. They need 23 more seats to flip it – doable. But predictions of a “blue wave” seem overly optimistic, given primary results.
Yes, in traditional GOP-leaning districts, Democratic primary turnout is up relative to history. But Republican turnout remains mostly higher. This suggests Democrats gain seats in balanced districts but struggle beyond that. Thanks to gerrymandering, there are only about 36 truly toss-up seats. Needing 23 of 36 seats isn’t bad odds, but it’s no slam dunk either.
Meanwhile, Republicans have almost no Senate seats to defend in traditionally Democratic states. But Democrats have vulnerable incumbents in 10 GOP leaning states.
Polls in tight races trended slightly more Republican as 2018 progresses. In recent primaries, while Democrats improved on past years, they underperformed pre-election polls. This suggests Republicans probably add one or two seats. Republicans look likely to flip seats in Indiana, North Dakota, Missouri and perhaps Florida. Meanwhile, Democrats likely flip a Republican seat in Tennessee, where popular Democratic former governor and businessman Phil Bredesen leads polls – and also against Republican Dean Heller’s Nevada seat. If Republicans take the first four while Democrats snatch the latter two, the GOP gains two seats. If the Democrats also flip Arizona, Republicans gain one seat.
Fundraising also suggests the “blue wave” is smaller than advertised. Democrats have done better funding individ- ual candidates. Through June 30, Democratic candidates raised more than $1 billion for midterms versus just more than $730 million for Republicans. Much of that money comes from traditionally liberal states funding out-ofstate races – such as former New York City mayor Mike Bloomberg’s pledge to donate $80 million to Democratic House candidates. Yet Republicans outearned Democrats at the committee level. Combined, the Republican National Committee and its House and Senate affiliates raised $422.5 million versus $373.9 million for their Democratic counterparts. There are pluses and minuses to both kinds of funding, but final results will depend hugely on which party allocates resources best in the final weeks, particularly in get out the vote activities where the difference often means several percentage points.
Whatever happens, we’ll likely get gridlock. If the Republicans keep their majority, little legislation will happen due to their heavy infighting. We’ve had that kind of gridlock for two years, much to markets’ delight. If the Democrats take one or both chambers, we’ll get traditional gridlock – a partisan divide between the White House and legislature. Without gridlock, markets face the possibility that big legislation could pass, and that causes risk aversion to rise among investors. This is why stock returns during a president’s first two years are weaker than years three and four. In the second half, after midterms render gridlock, legislative risk eases. With political uncertainty decreased, stocks party. We haven’t had a negative third year of a president’s term since
1939, when World War II was exploding. Since the 1920s, when Standard & Poor’s 500 stock index data began, stocks rose 87 percent of the time in each of the three quarters that follow a midterm. This 87 Percent Miracle is the gateway to strong returns in the presidential term’s second half.
That starts now. So don’t wait. Be as fully invested as you would ever be.