Macro Minutes: Midterms and Equity Markets

Key Points

• Equity markets are about to enter the phase in the US presidential election cycle with the strongest historical returns, the three consecutive quarters that begin with the midterm election.
• The president’s party tends to lose seats in midterm elections, often resulting in a gridlocked government that produces fewer legislative changes, which creates a more stable and orderly environment for business.
• Historically, gridlock promotes a “goldilocks” environment of slow-steady growth with low inflation. For this reason, given today’s uniquely high inflation and fears of tight monetary policy, the upcoming midterm could be a uniquely powerful tailwind for equities.