The mid-term elections are almost upon us. It is almost a certainty that there will be a substantial shift in the balance of power in congress. Although smart investors keep their politics and their investment strategies separate, it is still a good idea to consider how the election will affect your investments. In this regard, Forbes has some thoughts about the risk to stocks from the mid-term election.
We currently think there is only one scenario that has a reasonable probability of happening, looking at current political polling. (Yes, we get that polls are flawed but, in the aggregate, they do provide us insight). The highest probability scenario is the Democrats take the House, and Republicans retain the Senate.
Going back to 1934, the President’s party has lost seats in the House 86% of the time in midterm elections.
The bottom line to their argument is that a politically divided congress is worse for investors than when the same party controls both houses. All spending bills must, by law, start in the House of Representatives. But, both houses of congress and the president need to concur for a bill to become law. Divisive issues such as health care immigration will likely be hamstrung for the next two years. Issues such as infrastructure spending, trade, and antitrust law will have some hope of gathering a consensus and getting passed.
Will There Be A Correction and a Recovery?
A couple of months ago we asked if the mid-term elections would cause you to lose money. That analysis ignored who won or lost in mid-term elections and just looked at how the stock market fared afterwards. The insights came from Zack’s Investment Management.
Going back to 1962, the average correction during a midterm election year was an eyebrow raising -19%.
Since 1962, the average bounce for stocks following the midterm correction was a sturdy +31%.
According to these folks, you may lose money going into the mid-term election but gain more afterwards.
What Other Factors Are in the Mix?
There are two issues this year that stand out as risks. The first is the trade war with China and the fact that it may become permanent.
Both the USA and China see the trade war as “zero sum” game. A zero sum game is a situation in which the losses by one side are the gains of another and vice versa. China sees is place in the world as the dominant global economic and political power, which are positions now held by the USA. The USA sees itself as maintaining its place in the world and is justifiably fearful of a world controlled by China.
There may be a point at which neither side will back off of its demands. When that happens, trade between the USA and China will diminish. There is a chance that trade between China and Europe could also suffer is Europe adopts the view of the USA. This would result in different global trade patterns and diminished global trade.
The USA and EU have tiptoed around this China issue for years, taking advantage of cheap production costs while steadily losing manufacturing capacity and giving away trade secrets. That is likely to come to an end and the end may not be pretty. A well-functioning US government would be a positive factor in such a situation. But, that is not what we have today and there does not seem to be a remedy in sight no matter how the mid-term elections work out.
The other factor is the “elephant in the room” with the Mueller investigation into Russian meddling into the 2016 elections and how close that investigation will move toward the president himself. If the results of the investigation cast blame on the president and the Democrats take back the House of Representatives, impeachment is likely. Then the issues will be if the Democrats pick up seats in the Senate and if Republicans will follow party lines (the Trump Party or the Republican Party) with their votes.