US Midterm Elections Signal Approaching Period of Market Calm
Translated & summarized from Calcalist by baba
US midterm elections historically precede a period of market calm and consistent stock gains due to increased political gridlock. This pattern is expected to continue, benefiting markets globally, including in Israel.
The story in 5 lines · by baba
- US midterm elections historically precede a period of market calm and gains.
- Political gridlock resulting from midterms is seen as positive for stock markets.
- Global markets often follow US market trends due to high correlation.
- Israeli stocks also show a positive correlation with US market performance.
- This predictable pattern is expected to provide a boost to markets worldwide.
The upcoming US midterm elections are expected to usher in a period of significant market calm and consistent gains, a phenomenon observed historically following such electoral events. According to analysis, the nine months after US midterm elections consistently show stronger stock market performance than any other period. This positive trend extends globally due to a high correlation between US and international stock markets, with a correlation of 0.83. While the correlation between Israeli and US stocks is lower at 0.41, it remains significantly positive.
Historically, US presidents tend to pass major, controversial legislation early in their terms when support is high, knowing that midterms often weaken their party. This legislative activity increases uncertainty, leading to market stagnation. As midterm campaigns begin in the second year of a president's term, heightened rhetoric can cause market volatility. However, the elections themselves typically result in losses for the incumbent president's party, leading to deeper political gridlock. This gridlock is generally welcomed by markets as it reduces the likelihood of contentious, broad-reaching legislation.
Combined data shows that the fourth quarter of midterm election years and the first two quarters of the following year have historically been positive in 91% of cases, with an average return of 19.8%. This pattern is attributed to its predictability and the market's reaction to reduced political risk, regardless of party affiliation or earlier stock performance.
Despite current concerns over extreme rhetoric and the potential involvement of figures like Donald Trump, the market's perspective focuses on the almost certain deepening of political gridlock. This gridlock is seen as beneficial for stocks. Currently, Republicans hold a slim majority in both houses of Congress, with all House seats and 35 Senate seats up for election. Even minor shifts could lead to full political gridlock if Democrats gain control of at least one chamber, or a continued, albeit narrow, Republican majority that limits their ability to pass major legislation. By November, stock prices are expected to reflect this reduced political risk, providing an additional boost to markets in the US, Israel, and globally. The Tel Aviv 35 index has already seen a significant rise of 18.13% this year.
