We Looked At How The Stock Market Performs During Midterm Election

Will Democrats hang onto control, or can Republicans take Congress? If history is any guide, it won’t really matter for stocks because markets typically surge once election uncertainty is lifted.

Stocks are off to a rocky start so far this year thanks to a laundry list of challenges including inflation spikes and interest rate hikes. Midterm elections in November are going to make 2022 even trickier by adding yet another layer of uncertainty to the investing mix. 

Consumer prices are surging with inflation at nearly 40-year highs, supply chain issues continue to persist and coronavirus cases are spiking due to the Omicron variant. What’s more, the Federal Reserve has started tightening monetary policy in a bid to control inflation: Once the central bank finishes tapering its monthly asset purchases in March, it intends to hike interest rates three times later this year–something it hasn’t done since 2018.

“The worst that can happen for Democrats is if they lose control over both houses of Congress. In that case the market would win by losing, and see a slightly improved average performance.”

Come November, Republicans are hoping to win back control of either the House of Representatives or the Senate. They’ll need five seats to win a majority in the House and one seat in the Senate. Pennsylvania, Wisconsin, Arizona, Georgia and Florida all have key elections that could determine whether or not Congress flips. 

“The most favorable outcome for markets would be a Republican win in both the House and the Senate,” says Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. “If Republicans take the House and not the Senate, that would also be a relatively favorable outcome.”

To find out how various election results would impact stocks, Forbes analyzed market data going back to 1945 with the help of CFRA Research.

In short, when it comes to stock market performance, Democratic presidents have an edge. From 1945 through the end of 2021, the compound annual growth rate for the S&P 500 has been 9.4% under Democratic presidents compared with 6.6% for Republican commanders-in-chief. 

The best returns, however, have come under Democratic presidents kept in check by a split or Republican Congress. “Historically, investors prefer shared power across the Federal government,” says RSM chief economist Joe Bruseulas. 

For instance, President Barack Obama faced a split Congress from November 2010 to 2014, with Republicans holding the House of Representatives while Democrats held the Senate. Equity investors weren’t complaining: The S&P 500 surged nearly 70% during that period.

S&P 500 RETURNS UNDER VARIOUS POLITICAL SCENARIOS

^{Markets historically prefer Democratic presidents kept in check by a split Republican Congress.}

The S&P 500 average return in years where Democrats have simultaneously held…