Consider snoozing through the coming U.S. midterms

The U.S. midterm elections are dominating the headlines with just one more week of rallies, scandals and prognostications before voters decide which party will control the House and the Senate.

There is a lot at stake here for Americans and, potentially, for Canadians and others too. But should investors care?

Politics has become a central theme for investors, given the sometimes outrageous influence that U.S. President Donald Trump seems to exert on everything from trade to energy prices to debt costs.

Yet, for all the consternation, tuning out the noise has been a good call for investors holding a broad basket of U.S. stocks: The S&P 500 has gained 34 per cent since Trump’s presidential election victory in 2024.

But that doesn’t mean political decisions have had no impact.

Energy stocks – including Canadian names – have soared with Trump’s war against Iran. And stocks associated with artificial intelligence have met with little or no regulatory pushback.

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Conversely, let’s not forget about bonds. Prices have been hit as inflationary pressures build, sending yields higher and leaving investors wondering if a financial crisis could be brewing.

Chris Galipeau, head market strategist at Franklin Templeton Institute, looked at the historical market performance under different midterm scenarios over the past 10 election cycles when a Republican president has been in the White House.

There was a strong market reaction within three months of the results. But market performance didn’t vary much within a year, according to Galipeau’s numbers.

When Republicans controlled both the Senate and the House, in 2002, the S&P 500 gained 14.9 per cent within a year. When Democrats controlled both, which happened seven times since 1954, the index gained an average of 14.8 per cent.

And when the Republicans controlled the Senate and the Democrats controlled the House, in 1982 and 2018, the index gained 15.5 per cent on average.

From the best outcome to the worst, there is a difference of 18 percentage points within three months. But the difference shrinks to just a 0.7 percentage point within a year.

“Investors have a tendency to believe that politics heavily influence equity markets. The reality is quite different historically after midterm elections,” Galipeau said in his report.

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However, he can’t guarantee that history will repeat this time around, simply because there are other factors to consider.

Corporate profits are rising at a rapid pace. But just 10 companies – including Nvidia Corp., Micron Technology Inc. and Meta Platforms Inc. – within the S&P 500 account for about two-thirds of this growth, according to an analysis in The Wall Street Journal.

That could make stocks sensitive to a pullback regardless of how the midterms turn out.

Another important factor is the direction of interest rates. The Federal Reserve raised its key rate last month, and persistent inflation could push the central bank to raise rates again, adding a significant headwind to the bull market in stocks and the economy.

A third factor: Trump is still president.

“The policy differences between a split Congress – Democratic House and Republican Senate – and a Democratic sweep are simply not all that different given Trump is in the White House with veto authority,” Libby Cantrill, head of public policy at PIMCO, said in a note.

History suggests investors can simply hit the snooze button on Nov. 3. But what is your investment approach to the U.S. midterms? Let me know at dberman@globeandmail.com.

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