Investors, here’s your midterm playbook

Investors, here’s your midterm playbook

As polls close tonight, here’s what history says happens next

Today’s letter comes from Nick Fouriezos, a former Washington correspondent and tech CMO. With election day here, he breaks down what forecasters expect and what history says it means for your portfolio.

To investors,

A decade ago, I was standing outside an airport in Lakeland, Florida, as Trump Force One touched down in front of a crowd so packed and sweltering that people were fainting in the heat.

It felt like an ecstatic fit, a religious experience. But those days were a special type of insanity for this young campaign reporter, as I found myself jumping from senior homes in Iowa to stump speeches in New Hampshire diners and political summits in Texas rodeo bars.

Veteran reporters kept telling me how strange that election was, and how Trump had no chance.

We first-timers didn’t know any different, so we didn’t write off Trump as quickly as they did. And, of course, the polls were wrong.

That’s what I took from the trail: on election nights, anything can happen.

Polls close tonight, and once again, control of Congress is on the line.

The forecasters mostly agree that Democrats will win the House. But the Senate is closer. Democrats need a net gain of four seats.

Cook calls them “slight favorites,” Sabato’s Crystal Ball says they have “the inside track... albeit narrowly at 51 or 52 seats.” As such, prediction markets give them a 74% chance of winning the Senate.

However, 7 of the 14 most contested races are within 3 points.

So could the polls be wrong again?

A 2016-style miss is less likely this time, for one big reason: it’s a midterm.

In the last three presidential elections, polls overestimated Democrats by 3-5 points, according to Nate Silver.

In the last two midterms, the miss was under a point, and it went in opposite directions: polls slightly overestimated Republicans in 2018 and slightly overestimated Democrats in 2022.

The leading theory is that the voters polls struggle to reach are also the least likely to show up when the president isn’t on the ballot.

History says a miss could go either way … so don’t count on Republicans being under-counted like in 2016.

And the good news for investors? History also says the winner matters less than you think.

Stocks have risen after every midterm since WWII

The S&P 500 has gained in the 12 months after all 20 midterm elections since “The big one,” by an average of 14.8%.

It didn’t matter if chambers changed hands, or if Washington had split-party control: stocks still rose.

Under a Republican president with a split Congress, the S&P 500 has averaged 18% in the 12 months after a midterm, rising 93% of the time, according to a Motley Fool analysis going back to 1874.

The best stretch of the cycle usually starts now.

The after a midterm has averaged 17.2%, the strongest year of the cycle.

The reason is simple: markets hate uncertainty, and the election removes a big source of it.

But this isn’t a typical midterm year.

Usually, stocks fall about 17.5% at some point during a midterm year, and the rally comes from that low.

This year, the S&P 500 fell only about 9% before bottoming on March 30, and it is still up nearly 10% for the year.

That could mean some of the usual post-election rallies are already priced in. But under the surface, the market is already moving, according to our friend Phil Rosen at Opening Bell Daily.

The S&P 500 closed Friday one penny above where it closed on May 29. In October, the equal-weight S&P 500 beat the cap-weighted index by the widest margin since April 2009, as investors rotated from tech into energy and consumer staples.

And this time, the Fed is hiking. Traders see roughly a 76% chance of another rate hike in December, with the 10-year Treasury yield near 5%.

The industries to watch.

Democrats are favored to win the House, which means the biggest swing factor is the Senate.

Health care. A Democratic Congress would likely push to extend Affordable Care Act subsidies and hold hearings on drug prices, a tailwind for insurers that sell ACA plans and a headwind for drugmakers.

Retail and autos. A Democratic House means more oversight of tariffs, though the White House sets most trade policy on its own. Importers would welcome any pressure to ease them.

Consumer stocks. President Trump has tied his proposed $5,000 checks to Republicans keeping both chambers. A Republican sweep would put that stimulus back on the table, a boost for retailers but more pressure on inflation and bond yields.

Crypto and banks. The Senate confirms regulators, including future Fed governors and agency heads, and controls the Banking Committee where crypto’s stalled market structure bill sits. Whichever party wins it will shape the rules for both industries.

Your playbook.

Don’t trade the headlines tonight. The first-day reaction rarely sets the trend.

Watch the Fed and bond yields. They matter more to stocks this year than Congress does. And watch what’s happening under the index. The rotation out of Big Tech may be the bigger story.

Thanks for reading.

-Nick Fouriezos (@nick4iezos on X)

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