The 2022 mid-term elections in the United States will be held on Tuesday (8th), which are not only a mid-term exam for the Biden administration, but also preliminary to the 2024 presidential election.
Markets currently expect Republicans to at least gain control of the House of Representatives. Morgan Stanley analyst Michael Wilson sees a Republican victory as a potential catalyst for lower US Treasury yields and US equity gains.
A “big win” for Republicans could greatly increase the likelihood of a fiscal spending freeze and a cut in the largest budget deficit on record by raising 10-year US Treasury prices and keeping stocks rising.
It is worth noting that a large number of Republican candidates in this election have been approved by former President Trump. Markets could face greater political uncertainty over the next couple of years if Republicans win the election.
How are the elections underway?
The election will mainly re-elect 435 seats in the House of Representatives and 34 of the 100 seats in the Senate, while the elections of 39 state and territory governors will also be held. According to FiveThirtyEight data, Republicans are currently favorites to win the House of Representatives.
The Senate is considered unpredictable. Voters from six states, including Georgia, Pennsylvania, Nevada, Ohio, Arizona, and Wisconsin, are considered the key districts that determine final Senate ownership.
It is worth noting that mid-term election results may not be announced on November 8 because the ballot dates in Georgia and Louisiana are after the general election and, considering Georgia is currently a fluctuating state, the final results for the two parties could be at the latest. It will be revealed on December 6th.
If the Democrats lose to the Republicans in the House or Senate, the power of the Democrats will be drastically reduced. During the next two years of Biden’s tenure, Democrats can pretty much say goodbye to any major legislation.
Biden will also face a Republican impeachment attack. If Republicans gain some control of Congress, they will be able to investigate Democrats through subpoenas and court hearings. Some Republicans have expressed their desire to impeach Biden. Similar to Trump’s impeachment farce in 2020 and 2021, Biden could repeat itself and market uncertainty will increase dramatically.
What is the impact on US equities?
Historically, US equities have generally ushered in a wave of gains after the mid-term elections. The reason is that US politicians usually formulate more accommodating policies to get elected and cash out after being elected.
UBS found through the statistics of 18 mid-term elections after 1950,S&P 500 IndexThe average gain from August of the mid-term election year to March of the following year was 14.5%, with a median of 16.4%.
Furthermore, some investors see a divided government as good for the stock market: the government cannot do anything and there will be no more uncertainties in the next couple of years, which will add certainty to business operations.
But it is important to note that historically, after the 2010 mid-term elections, the impasse in the US government led to problems with the long-term debt ceiling and the closure of the government. Although the 2011 Budget Control Act addressed the situation, the act was to implement an austerity fiscal policy while the economy was still weak.
Morgan Stanley analyst Michael Wilson believes there should be short-term volatility ahead of the mid-term election results, especially given investor anxiety over the consumer price index.
In terms of US actions, US military industrial actions are more closely tied to elections. Markets now expect US defense spending to rise regardless of Tuesday’s vote, but a Republican victory would set the stage for “significant” growth, with a “modest” rise if Democrats retain control of one or more. both bedrooms.
Clean energy headlines are also worth looking at. If the Democrats retain control of Congress, their green energy legislation should continue to advance. And pharmaceutical and biotech stocks could benefit from a Republican victory after Democrats recently pushed a law aimed at lowering the prices of prescription drugs.
What about the impact on US Treasuries and the US dollar?
Markets now expect US bond prices to rise if Republicans win control of the House and Senate, but the dollar will extend gains if Democrats bail out both houses.
For US bond investors, the biggest variable this year comes from the US Federal Reserve (Fed). President Powell previously broke market expectations for the central bank to turn into doves, saying the pace of rate hikes interest will be slowed, but the final interest rate may be higher.
Republicans have publicly said they want to limit public spending, and some lawmakers have proposed gradually increasing the eligibility age for Medicare and Social Security. Tight fiscal policy has historically been associated with lower inflation and has made investments in US Treasuries more attractive.
Some US bond investors are currently hoping the Democrats will lose the election, which will reduce the chances of the Democrats passing more fiscal stimulus packages and reduce the pressure on Powell to continue raising interest rates, thereby pushing the price of US bonds down. bounce and the dollar to fall.
However, Haitong Securities believes the mid-term elections may not change the current market situation with a strong dollar, high interest rates and weak US stocks.
On the one hand, the US economy is still resilient: at the end of October, the annualized growth rate of the US weekly economic index was still around 2%, a better percentage than the pre-pandemic level. On the other hand, core inflationary pressure in the US is still high and it is difficult to see a significant cooling trend in the short term, coupled with the good performance of the US labor market and the unemployment rate remaining close to a record low. the Fed could extend the rate hike cycle, the dollar will remain strong and US debt will remain strong. Yields are still likely to rise and the US equity market adjustment is not yet over.
Prevent a planned electoral reversal
It is worth noting that as more Americans use mail-order voting, the prediction of results with traditional tracking methods has been inaccurate: if the Democratic Party believes that performance is better than expected, it is more likely to lead to a increased market volatility.
At the moment, the market has basically discounted the expectation of a Republican victory. If the Democratic Party unexpectedly wins, it will allow the Democratic Congress to implement more expansive fiscal policies in response to Biden’s “Build Back Better Act” bill. Impact It could be that US Treasury yields continue to rise and the dollar strengthens, with a higher final rate.
