Everyone is afraid of a Democratic victory, but what if that is what the market really wants? π
On Tuesday, November 3, Americans elect all 435 members of the House of Representatives and 35 Senate seats. πΊπΈ
These are the "midterm elections": two years after the presidential election, when the president himself is not on the ballot. πΊπΈ
Wall Street approaches them with one big fear... π©
But when you break down the words "Democratic victory," you find they do not mean just one clear-cut thing. π
First of all, what is the market already pricing in?β
We went to check things out on the Kalshi platform π°
Kalshi is a prediction market, a regulated US exchange where traders bet real money on the outcomes of events. π°
The price of each contract is, simply, the probability that traders assign to the outcome. π
- As of Sunday (1.11) at 21:00 Israel time: π
- Democrats take the House of Representatives: 93% π’
- Democrats take the Senate: 71% π’
- Both chambers to the Democrats: about 70% π’
- House of Representatives to the Democrats, Senate remains Republican: 26% π‘
- Both chambers to the Republicans: about 7% π΄
What is Wall Street afraid of?
Michael Hartnett of Bank of America estimated in early October that if the Democrats take both chambers, US stocks could fall by more than 10%. π¨
The main reason is AI. π€
According to Bloomberg, a Democratic Congress is expected to increase oversight of the AI industry and data center construction, and perhaps shift a larger share of electricity costs onto AI developers. β
But there is a built-in brake here that is important to recognize. βοΈ
Trump has a veto, and overriding it requires a two-thirds majority in both chambers. π
Therefore, according to Bloomberg, the more likely path for pressure on the industry is committee investigations and hearings, not legislation. π«
And this is where the story flips π
Congress is made up of two chambers. When each chamber is controlled by a different party, it is a "split Congress": every bill requires both parties, and almost no major legislation passes. β
On Wall Street, they call this gridlock, a standstill. π§
And now look at Carson's numbers, as quoted by Bloomberg. π
- Under a Republican president, since 1950, the S&P 500 rose on average per year:
- 13.7% with a split Congress βοΈ
- 8.3% with a Republican Congress π’
- 4.9% with a Democratic Congress π‘
Did you notice? π
The best scenario in history is also a Democratic victory, only a partial one: the House of Representatives to the Democrats, and the Senate remains Republican. π‘
Bank of America also sees it this way; in the same estimate, if the Republicans keep the Senate, stocks could rise by more than 5%. πΌ
Hartnett called this a "Goldilocks" scenario, not too hot and not too cold. π
And according to Bloomberg, as early as September, Stuart Kaiser of Citi said that a split government "will force gridlock or compromise," and that this is the most likely and positive scenario for the market. π‘
Why does the market love gridlock? Quite simple: β¬οΈ
Without major legislation, there are no big surprises, not in taxes, not in spending, and not in regulation. According to Bloomberg, history shows that gridlock in Congress is also good for bonds, because it stops programs that increase the deficit.
And there is another term you will hear a lot this week: "lame duck." πͺΏ
This is what they call a president in the US who can no longer run again, and in his last two years struggles to pass legislation. πΊπΈ
Trump is in his second and final term. Facing a split Congress, he is left mostly with the veto. π§ββοΈ
And one final point, what does the market do after the elections? π
π According to Wells Fargo, the S&P 500 rose in the 12 months following every midterm election since World War II, regardless of who won. π
π According to TradingView data published by Benzinga, since 1950 the index rose from the end of October to the end of the year in 13 out of 19 midterm election years, by an average of 3.6%. πΌ
π According to Truist, stocks tend to weaken in the months leading up to the midterm elections and recover only as the vote approaches. π
We also went deeper: what do the midterm elections mean for the sectors?
- Healthcare: π According to Wolfe Research, hospitals could benefit if Democrats reverse cuts to Medicaid, the government health insurance for low-income individuals. The healthcare sector ETF ($XLV) rose about 9.8% in October and closed on 30.10 at its year-to-date high.
- Defense: βοΈ According to Bloomberg, if Democrats push to rein in the defense budget, defense contractors will feel it. The aerospace and defense ETF ($ITA) has already fallen about 17% from its August peak.
- Banks: π¦ According to JPMorgan, a full Republican victory would benefit Bank of America ($BAC), Citigroup ($C), and Wells Fargo ($WFC), as Republicans tend to favor lighter regulation on banks.
In conclusion,
The market is pricing in a Democratic victory. β οΈ
History favors a partial Democratic victory. π‘
And the difference between them will be decided this week in the Senate. π