Midterm Elections and Markets: An Investor Watch List

Stocks, taxes, spending, health care and big tech could all see political upheaval depending on the results of Tuesday’s midterm elections.

There are a few potential outcomes – Democrats retaining control of both the House and Senate; Republicans taking the House while Democrats hold the Senate; and Republicans taking control of both houses of Congress.

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Banks, including JPMorgan, Morgan Stanley and Merrill Lynchnoted that recent polls indicate the most likely scenario is a divided government.

FiveThirtyEight described Democrats and Republicans as being in a “dead heatfor the Senate on Friday. For the House, the Republicans were “favorites” to win, according the Election Polls and Predictions website.

Ahead of Tuesday’s mid-terms, FOX Business examines key issues for investors and potential outcomes.

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There is generally more volatility before, during and after Election Day because markets generally do not promote uncertainty.

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Democrats retaining their grip on both legislative chambers – that JPMorgan describe in an Oct. 28 article as “generally considered the least likely outcome of a divided government” — could lead to more stock swings. Meanwhile, the bank said House Republicans and Senate Democrats are “likely to be the least important to the markets” due to the standoff.

Overall, however, midterm elections generally don’t have a huge impact on stock markets, according to JP Morganwho noted that the S&P 500 “trends higher after political uncertainty wanes following the midterm elections.”

Merrill Lynch also reported that stocks generally rebound from mid-term volatility. Twelve months after the ‘midterm election year low’, stock markets are trending up more than 30%, according an October report from its chief investment office.

When one party controls one house of Congress and the other party owns the other, short-term returns have always been higher, according to Merrill Lynch. In the past, the S&P500 the average gain over a two-year period after the election was 18.7% with a split Congress and 17.3% with the party holding the White House equally in control of both chambers, according to the report.

Taxes

Two of the potential midterm election results would tax increases Unlikely: If Republicans gain control of both houses or if Republicans control the House but not the Senate, according to JPMorgan.

Under a divided Congress, Democrats and Republicans could also reach an agreement on research and development expense deductions and improved child tax credits, Merrill Lynch said.

Meanwhile, proposed measures to raise taxes on corporations, high net worth individuals and capital gains could see replays in case Democrats retain their grip on the House and Senate, Morgan Stanley and Merrill Lynch reported.

Some proposals, such as closing the carried interest loophole, were dropped before the Inflation Reduction Act was finalized in August.

Expenses

According to the Merrill Lynch report, a politically divided legislative branch “will be seen as less accommodating to new spending.” The likelihood of a fiscal bailout during an economic downturn would also be lower, according to JPMorgan.

However, there could be cases of agreement if the Republicans control the House and the Democrats control the Senate, in particular for the increases of defense and cybersecurity spending, according to Morgan Stanley.

There would probably be more spending restrictions under Republicans holding both houses, with one exception — defense spending, Merrill Lynch theorized.

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Democrats, if they controlled both the House and the Senate, would likely seek extra spending on certain proposals, such as housing assistance, universal child care and Medicaid, according to some banks.

Health care

The legislative deadlock associated with a divided Congress could hamper health care proposals who stray too far from the center politically.

In the event that Democrats retain both chambers, Medicaid and some other health care programs could see expansion, some Wall Street banks say.

According to Merrill Lynch, measures such as Medicare for All and more controls on drug prices would not be likely to go forward in a Republican-controlled House and Senate. Republicans having both chambers could “cloud the outlook” for “any” healthcare-related proposal, JPMorgan predicted.

Big tech

Big tech companies are likely to see more regulatory scrutiny if Democrats maintain control of the House and Senate, according to JPMorgan and Morgan Stanley.

In September, President Joe Biden’s administration called for reforms in the tech sector, including increased competition, putting in place limits on the collection and use of personal data, and more transparency. He expressed his support for antitrust legislation.

JPMorgan said in October that “technology company legislation” and other aspects of the Democratic agenda would likely be “out of order for the foreseeable future” if Republicans took both houses.