The US held its mid-term elections yesterday and, despite consistent polling showing a likely ‘red wave’ which would return the House of Representatives to Republican control with the Senate a strong chance of flipping as well, the race has shocked pundits
The US held its mid-term elections yesterday and, despite consistent polling showing a likely ‘red wave’ which would return the House of Representatives to Republican control with the Senate a strong chance of flipping as well, the race has shocked pundits and, as of this morning, is looking a very decent chance of remaining in Democrat hands or swinging to the Republicans with only a tiny majority. All things being equal, the first mid-terms following a first term of a new President have historically swung away from the incumbent party, and this year was expected to be no different with a slowing economy and raging inflation the key backdrops to this year’s race. And, despite a divided government likely spelling the end to any meaningful legislation, stock markets typically perform well in the following twelve months in a divided government.
Markets fell overnight on the outcome even though we still don’t quite know which party will control the House and Senate. What is known, however, is that any Republican control will be razor-thin and that the more moderate wing of the party will have a major say in policy and will, for all intents and purposes, be the kingmakers for the next two years. Despite the market’s overnight reaction, we don’t feel the outcome is likely to have a lasting impact on the market’s direction with inflation and interest rates a far bigger determinant but, if anything, these elections have dramatically reduced the chances of a standoff in extending the debt ceiling in 2023 which could have had massive implications for markets.
