Policy, Not Politics

Weekly Market Update | October 26, 2022

Highlights

Stocks surged globally as large U.S. banks highlighted a resilient U.S. consumer with the MSCI All Country World Index rising 3.2%. In the United States, the S&P 500 rallied 4.7% while the Dow Jones climbed 4.9%. The tech-heavy NASDAQ popped 5.2% as a major streaming service beat expectations. Equity markets overseas were mixed with European stocks adding 1.7% while Japanese stocks tumbled 2.0%. The 10-year U.S. Treasury yield jumped 20 basis points to 4.22%.

Monetary policy and politics will dominate the next couple of weeks. When it comes to financial markets, we believe the Fed’s upcoming FOMC meeting in early November will likely be more telling than the U.S. midterm elections with a divided government the most likely outcome.

U.S. midterm elections tend to benefit the current president’s opposing party. Since 1982, the ruling party has lost an average of 22 House seats and 4 Senate seats. In fact, the president’s party has only gained seats in the House twice since the Civil War in a midterm election. Based on current polling, Republicans appear likely to retake the House while the Senate remains more of a toss-up.

A divided government is not necessarily a bad environment for financial markets. Between 1960 and 2021, there was a Democratic president with a Republican Congress six times – and this combination has offered the best returns of each of the possible scenarios, yielding an average annual S&P 500 return of 18.5%.