From Fidelity Wealth Management

Key takeaways

  • Historical trends and economic concerns favor Republicans taking over the House this fall, while control of the Senate appears to be a toss-up. However, uncertainty remains and no election outcome is guaranteed.

  • Under divided government, legislating would be difficult and the focus would likely turn to the regulatory agenda.

  • Generally speaking, the election cycle has not been the dominant theme for markets and there has not been a strong relationship between election day outcomes and market performance.

On November 8, 2022, Americans will go to the polls to determine which party will control Congress alongside several state, municipal, and local contests. In a year that has already seen a fair share of uncertainty, with the war in Ukraine, increased market volatility, and rising inflation, investors may be concerned about further disruption in the markets.

However, while the outcome of the election will impact what legislation might stand a chance of getting through a sharply divided Congress, the outcome — whether it’s a shift in power or a reinforcement of the status quo — may not have as much of an impact on markets as you might expect.

How likely is a shift in power?

All 435 seats in the US House of Representatives are up for election this year, and Democrats currently hold a slim, 8-seat majority. “Historical trends show that momentum is in favor of the Republican party, and notably there are a historic number of Democratic House retirements,” says Alice Joe, a vice president on Fidelity’s Government Relations team.

“It’s typical for control to flip when you have a first-term president who is in the same party that currently controls the House. Looking at 3 of the 4 most recent presidents, Clinton, Obama, and Trump, their respective parties all lost House seats in their first term.” In fact, since 1862, the incumbent president’s party has lost House seats in 36 out of 40 midterm elections and Senate seats in 13 out of 19. However, just like with investing, the past does not always predict the future; the House staying under Democratic control remains a possibility.

The Senate is currently split 50-50 between Democrats and Republicans, with Vice President Kamala Harris’s tiebreaking vote giving Democrats control of the chamber. This cycle, 35 seats are up for election, and several close races are expected.

How will the outcome affect policy?

Should Republicans take control of the House, Alice Joe expects the party to use the chamber’s vast oversight powers to take a closer look at many Biden administration policies, such as the recent decision to forgive student loan debt and the withdrawal from Afghanistan.

Regulatory agencies will also face more scrutiny, and could be reined in from a more aggressive agenda.

A Republican Senate would present a major roadblock for President Biden, potentially hampering his ability to nominate cabinet officials, judges, and other positions that require Senate confirmation.

Nevertheless, there may be opportunities for bipartisan cooperation, even under divided government. Joe points to the pending SECURE Act 2.0, which would implement reforms around retirement savings, and passed the House in March on a near-unanimous vote.

Joe expects the Senate will pass it sometime before the end of this year, regardless of the outcome of the election. “Retirement has always been bipartisan,” she says. Additionally, we could see agreement on less polarizing issues, such as defense spending, taxes, or certain health care provisions.

In the event that Democrats retain control of both chambers of Congress, Joe believes they may revisit proposals that were initially included in the Build Back Better Act that did not make it into the final Inflation Reduction Act.

How might the outcome affect the market?

“If you’re an investor, I would suggest that this shouldn’t be something you focus on,” says Denise Chisholm, director of quantitative market strategy at Fidelity Investments. “It’s my belief that you shouldn’t be making big changes in your portfolio because of the election.”

Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of our clients who have a managed account, agrees. “Historically, we haven’t seen a strong relationship between Election Day outcomes and how markets perform from there on out,” says Malwal. “So we don’t adjust our positioning based solely on election outcomes.”

“The election cycle is usually not the dominant theme of the market,” says Chisholm. “But the year following the midterm election tends to be the year with the narrowest range of returns — whether or not there’s a change in control.”

In analyzing how markets have performed across election cycles, Chisholm looked at historical data since 1950, tallying up the price returns for the 12-month periods between federal elections.

“Historically, we’ve seen the best average returns in the 12 months following the midterm elections. The worst average returns with the highest variability in outcomes historically have been in the 12 months preceding the midterm election.

The returns are still positive, just not as high. So, in the past, what we’ve seen is the 12 months following the midterms have had the least amount of variance, and the least amount of downside.”

Chisholm says this could be because the resolution of the uncertainty surrounding the election calms investors, but overall feels that markets are largely taking their cues from other developments. “The wide range of outcomes you see in the analysis highlights that it’s probably not politics that are driving stock performance.

This year, how markets react is likely going to be driven by inflation, or whether investors expect a recession or not, or by what the Federal Reserve does. Politics likely won’t have much of an impact.”

Adds Malwal, “When managing client accounts, the US business cycle is the primary driver of our investment decisions. That’s because we believe the pace of US economic growth and the direction of corporate profits are much stronger drivers of stocks over the long run.”

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Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans that incorporate Socially Responsible Investment (SRI) factors and Environmental, Social and Governance (ESG) elements. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.