Midterm Election Outcome Expected to Boost Stock Market, Analyst Says

The approaching U.S. midterm elections, with Democrats anticipated to gain control of the House of Representatives and potentially the Senate, are poised to deliver positive outcomes for stock market prices, according to financial commentator Hamish McRae.

Historically, the 12-month period following midterm elections since 1950 has seen the S&P 500 index rise, averaging a 15 percent gain. The largest increase was 43 percent after the 1954 elections, while the smallest gain was 3 percent following the 1986 vote, even with the inclusion of the Black Monday stock market crash in October 1987. This historical trend suggests that investors can expect positive returns even if market volatility occurs.

McRae points to a historical preference among investors for legislative gridlock, particularly when different parties control the House and the Senate. This division often prevents the enactment of disruptive legislation, allowing businesses to focus on profitability. Data indicates that under Republican presidents, the highest share returns since 1950 have occurred with a divided Congress. Therefore, a scenario with a Democratic House and a Republican Senate is viewed as potentially ideal for the markets.

Despite ongoing economic challenges such as inflation, war, and rising interest rates, U.S. corporations have demonstrated strong performance, with S&P 500 members reporting a 29 percent year-on-year increase in earnings. The prospect of a constrained presidency and a less effective Congress is seen as favorable for continued business operations and profitability.

The positive outlook for U.S. equity markets is also expected to offer a degree of comfort to U.K. savers, as a significant portion of U.K. investor portfolios, typically over half, is invested in U.S. stocks. London's stock market movements often mirror those in New York due to the U.S. market's dominant share of global equities.

McRae also touches on the differing investment cultures between the U.S. and the U.K., noting that a larger proportion of U.S. household net worth is invested in equities compared to residential property. This creates a substantial pool of risk capital available to fund American businesses. The U.K.'s tax system, which offers capital gains tax exemption on main homes while taxing equity gains (outside of pensions and ISAs), is suggested as a factor contributing to this difference. This disparity may lead U.K. startups to seek funding and growth opportunities in the United States.

Reflecting on the broader economic sentiment, McRae cites President Calvin Coolidge's 1925 observation that "the chief business of the American people is business," suggesting that this focus on commerce underpins the nation's economic success.