Gridlock Ahead? Why a Divided Government Is Actually GOOD for Stocks
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The dust is still settling from the 2022 midterm elections. While some races are still being settled, the Republican party is poised to retake the House of Representatives. If Democrats maintain their hold on the Senate, it will mean a divided government for the next two years. Markets have reacted poorly to the day’s news, with all three major indexes falling. However, while today’s markets are currently clouded by uncertainty, they may bounce back in the coming year. While Wall Street traditionally hates an uncertain economic landscape, it loves political gridlock. In fact, history indicates that markets are destined for a strong turnaround in 2023. And a divided government could be exactly what they need.
Let’s take a closer look at why this is and what investors can expect as markets move forward from the 2022 midterms.
What a Divided Government Means for Investors
Any financial historian knows two things when it comes to markets and midterms. Markets historically struggle in the weeks leading up to a midterm election cycle. But like clockwork, they rebound in the months that follow, often surging to impressive heights. InvestorPlace Senior Investment Analyst Luke Lango predicts that yesterday’s election will usher in a new bull market for which investors should be ready. As he notes, in the twenty midterm elections that the U.S. has held since World War II, stocks have risen throughout the following year with no selloffs. And as Lango highlights, the post-midterm rally tends to be especially strong when the election was preceded by stocks sliding.
All this bodes very well for U.S. companies in 2023. In fact, the 2022 midterms may have created the ideal political landscape for the new bull market that Lango describes. Deutsche Bank strategist Jim Reid recently described midterm cycles as one of Wall Street’s best buy signals for equities. There’s a good reason for that. As the New York Times reports:
“According to LPL Financial, since 1950, the S&P 500 has outperformed (on a 52-week basis) whenever voters produce the power scenario of a split or Republican-controlled Congress and a Democratic president.”
Why is gridlock good for the stock market? Primarily because a divided government can help preserve the status quo. When no major changes are afoot, it is often easier for stocks to rally, as there is little to no uncertainty casting doubt over investment decisions. Without the threat of heavy regulation, the financial services sector is likely to thrive.
Things may be complicated for the big tech companies who have received criticism from both sides of the aisle. However, positive market momentum tends to boost all sectors to varying degrees. The predicted market turnaround will reach most companies, even if the gridlock means a decrease in government spending.
What Comes Next
For the investors who spent the last few weeks watching the polls with gritted teeth, the time of uncertainty is mostly over. While a strong turnaround is likely, it won’t happen overnight. But as markets gradually start to reverse course and trend upward, most sectors will rise.
For the investors who are still worried about a divided government, there are plenty of stocks to buy to stay ahead of any turbulence the 2023 gridlock may bring. While nothing is guaranteed, it’s clear that as of now, the midterm results are likely to set the market up for an excellent rally in the coming year.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.