A weaker than anticipated result for the Republican Party during the United States’ midterm elections has fanned hopes of a resurgence in the share market, which according to AMP Capital chief economist Dr Shane Oliver, is “showing more signs of having bottomed”.
The Republicans are expected to win a slim majority in the US House of Representatives, with the Republicans and Democrats neck-and-neck in the Senate.
Drawing from the economic outcomes of previous political deadlocks in the United States, Dr Oliver observed that this latest result could be good news for share markets.
“First, getting the midterms out of the way and legislative gridlock in Congress (which prevents extreme economic policies) have historically been good for US shares resulting in shares rising in the 12 months after each of the midterms since 1950 and higher than average returns in the third year of presidential election cycle,” he said.
Divided government, he added, would signal a return to government funding disputes, with a resolution required from 16 December to raise the debt ceiling and avoid default.
However, a slim Republican majority in the House could support a swift resolution.
“A somewhat smoother path with less risk would occur if the Republicans get control of both the House and Senate,” he observed.
“But even if they don’t get the Senate, their likely relatively narrow victory in the House means they may not be as obstructionist because moderate Republicans may vote with the Democrats to avoid major problems.”
Conversely, Seema Shah, chief global strategist at Principal Asset Management, has flagged downside risks, noting that such outcomes have historically “elevated inflation, the Fed’s inflation response, and the resulting risk of recession”.
These factors, along with key structural policy decisions, would determine the market’s direction.
“While there may be elevated volatility around the midterm elections, the yet-to-be determined outcome and resulting make-up of congress is unlikely to have a meaningful bearing on investment portfolios over the long term,” Ms Shah said.
“Investors should instead focus on the economics — rising interest rates, elevated inflation, and the looming potential of recession — that will be responsible for market returns in the periods ahead.”
These headwinds could be exacerbated by heightened geopolitical risks, with Dr Oliver observing that US President Joe Biden may adopt a more “hawkish” geopolitical posture to appease Republicans in an effort to push through legislation.
“An even more hawkish US stance toward China could impact Australia via increased sanctions on China along with an increased risk of conflict over Taiwan,” he added.
