Author: Saqib Iqbal Ahmed
Article: Original article
Publication date: Thursday, November 17, 2022
Split control of the U.S. Congress after the 2022 midterm elections may be the driving force for stocks at the end of a tough year. However, investors believe that inflation crisis and the Fed policy will mainly influence stock price changes.
Republicans edged towards U.S. House majority. The result means a split of U.S. Congress as President Joe Biden's Democratic Party maintains control of the Senate.
As there is split U.S. Congress, major policy changes will be unlikely, and this stability calms investors.
Divided governments are generally thought to be good for the stock market when a Democrat is the President: according to data since 1932 revealed by RBC Capital Markets, average annual S&P 500 returns have been 14% under such conditions. When Democrats took control of both the White House and Congress, the result was different — 10%.
Democrats will keep control of the Senate and it may be favorable for utilities, consumer goods, healthcare, and renewable energy, as stated by John Lynch, chief investment officer for Comerica Wealth Management.
Meanwhile, split Congress may be an obstacle for Democrats to push through several large tax initiatives, including $369 billion in climate and energy solutions and a windfall tax on oil and gas producers, according to analysts at UBS Global Wealth Management.
Some fret about the fact that such spending couldn't help ease inflation at a time when the Fed has begun quantitative tightening on unprecedented scale.
On the other hand, the political gridlock is associated with its own risks, including a possible controversy over raising the U.S. debt limit, which could make the economy weaker when interest rates are still record-breaking.
Nevertheless, this year, macroeconomic issues and monetary policy were the main drivers for the markets, and investors doubt that this will change in the short term.
According to Michael Antonelli, managing director and market strategist at Baird, inflation is the world's biggest worry now.
Some of them also expect stocks to jump on seasonal anomalies: the S&P 500 usually ends November and December with the second- and third-biggest average monthly percentage gains since 1950.
However, seasonal patterns may depend on whether they are seen within a bear market that happens when stocks fall by 20% or more from their highs.
As stated by Antonelli, the bull markets usually describe favorable end of year for stocks. There are no seasonal patterns at the end of the year in bear markets.
Forecast: short-term growth of S&P 500 to the level of 4100