Voters from all over the country will head to the polls on Tuesday to vote on a number of key Congressional races that will determine which political party ends up with a majority of seats in each body of Congress.
Investors will be anxiously awaiting the results, as laws passed in Congress can heavily impact stocks. For instance, Congress has the power to raise or lower the corporate tax rate, which can immediately impact the bottom line of a company's financial results.
Election results can be unpredictable and emotional, especially given how partisan things have gotten in Washington, D.C. But regardless of your political party, one thing is certain about tomorrow's results: they should help lift the stock market. Here's why.
Historically speaking
Currently, based on polling (which past experience shows isn't always right), the Republicans are expected to take control of the U.S. House of Representatives. The polling site FiveThirtyEight.com simulated the midterm election results 40,000 times to see which party wins the most and found that there is roughly an 80% chance the Republicans take control of the House. The same methodology suggests there will be a dead heat for the U.S. Senate.
Image source: Getty Images.
So, following the midterm elections tomorrow, it looks like there will be a Democratic President, a Republican House, and then a toss-up for the Senate. The good news is that either outcome could boost the stock market. A divided Congress has historically benefited the market because it makes it harder for either side to pass major legislation that might be more restrictive to corporate America.
According to the global asset management and research firm Alliance Bernstein, the S&P 500 has put up an average annual gain of 16% when the president is a Democrat and Congress is split. The data is only up to 2018, however, and this has only occurred in four years. When a Democrat is president and Republicans control Congress, the S&P 500 has notched annual gains of 15% -- and there is a larger sample set of 10 years for this outcome.
Each of these outcomes is better than the S&P 500's average annual growth rate of 10.7% over the past 30 years, so history tells us markets have a strong chance of outperforming whatever the outcome is tomorrow.
Regardless of your politics, cheer up
Politics tends to be a hot-button issue, and the country is undoubtedly experiencing a time of great partisanship at the moment. So tomorrow could be a tough day, depending on which party you are affiliated with.
Still, history tells us that either outcome tomorrow could boost the market. Obviously, there is no guarantee that the past will predict the future, and investors are concerned about the distinct possibility of a recession next year. But since 1939, regardless of which party has taken control of Congress, stocks have gone up following the midterm elections -- and not just by a little bit. According to a study from U.S. Bancorp, starting on Nov. 1 of a midterm election year, the S&P 500 delivered, on average, an outstanding 15% return over the following six months, dating all the way back to 1962.
So, whatever happens tomorrow, you can take some solace in knowing that this has historically been a good time for stocks in the near term and long term.
