US mid terms loom as a potential catalyst for equities.

The US midterm elections are coming up next week on 8 November and have the potential to have a big say on the direction and volatility of the US and global markets. All the 435 seats in the House of representatives will be decided upon. Currently, the makeup of the house includes 220 Democrats, 212 republicans and 3 vacant seats.

The senate is just as intriguing with the senate essentially split 50 – 50, with the Democrats having the support of 2 independents. This means that Vice President, Kamala Harris has the deciding opinion on bills that get put forward. It also means that the Republicans only need one more seat to take control of the senate. This is crucial because it means if the Republicans take control, then bills put forward by Democrats will face a much tougher road to turn into law. It is also possible that the Republicans could take both the senate and the house of representatives which would make it almost impossible for the Democrats and Joe Biden to pass any legislation.

Impact on the Markets

When US elections occur, there tends to be a decrease in performance before the election and increase in volatility around the US markets. After the election there is usually a period of growth for equities. The issue at the forefront of all American’s minds is still inflation and the new government will deal with it.

A major impact on the economy may be the government’s ability to deal with issues surrounding the economy such as inflation, a recession, or other fiscal matters. For instance, a gridlocked congress will restrict the President’s ability come up with policies that the Republicans will ok. The president may have to resort to using Executive orders which are more limited in scope and done without support of congress. More responsibility might be taken by the Federal Reserve to loosen monetary policy to fight a potential recession without fiscal support. This bodes well for the equities market and dampen some of the strength of the US dollar. From a more ideological perspective, Biden’s push for environmental and sustainability reform. Biden and the democrats have pushed forward policies that have supported these developments. Therefore, money flow away from these sectors if that support gets pushed away.

Ultimately, the midterm elections will likely have some effect on both the direction and volatility of the market. A swing towards the Republicans may see a shift in volatility and sentiment across the economy.