The Zhitong Finance App notes that the US midterm election season has entered the final sprint stage, and Wall Street is busy formulating coping strategies for various situations that may arise. However, in an unexpected favorable turn, the best outcome for the market also seemed to be the most likely outcome. Investors are increasingly convinced that the Democratic Party will win the House of Representatives in November, while also believing that the Republican Party has a slight advantage in the Senate. For many market watchers, this is the ideal situation, with the least risk of triggering disruptive policies.
The market is betting on “splitting the National Assembly,” and the stock market may welcome a reassuring rebound
While confidence in these results is not unfounded, it is far from certain. In the prediction market, the Democratic Party is definitely the favorite to control the House of Representatives. However, the Senate rivalry has heated up, and the Republican Party currently has only a slight lead in Kalshi and Polymarket.
Brian Gardner (Brian Gardner), Stifel's chief Washington policy strategist, said: “Investors expect Congress to be divided between two parties. If this is the case, and the Democratic Party has achieved the goals needed to win the House of Representatives, but has not formed a 'blue tide' to win the election, I expect a wave of relieved rebound afterwards.”
In the past 13 years when Congress was divided into two parties, the average return on the S&P 500 index reached 17%.
As the election approaches, Wall Street increases volatility hedging
Meanwhile, Wall Street is dealing with market fluctuations brought about by the midterm elections. The futures market linked to the Chicago Board Options Exchange Volatility Index (VIX) showed a rise in market demand to hedge against the risk of fluctuations in the S&P 500 index in early November.
Evercore ISI advises traders to prepare for potential sharp market fluctuations by implementing a so-called “straddle arbitrage” (Straddle) strategy on the SPDR S&P 500 ETF Trust (SPY). This option strategy allows traders to profit from sharp rises and falls without making directional bets. The operation method is to simultaneously buy bullish and put options that expire in November and have an exercise price of $770.
Julian Emanuel (Julian Emanuel), the agency's strategist, said that given the attractive price of the position, the VIX index is still far below its long-term average despite the environmental forces driving the stock market's sharp rise and fall. “The risk of accidents is grossly underestimated.”
Traders prepare to hedge against midterm election anxiety The VIX futures curve shows an increase in demand to hedge against the risk of fluctuations in the S&P 500 index.
Regarding the election results, Wall Street's idea is that if the two houses are led by different political parties, the possibility of introducing aggressive policy changes (whether in the fields of artificial intelligence, national defense, or healthcare) will be reduced, which means the market will face less uncertainty.
Historically, a divided Congress has always been good for the US stock market. According to data compiled by Carson Investment Research, since 1950, during the period when the Republican president was in power and Congress was divided between the two parties, US stocks have risen by an average of 13.7% per year. In contrast, when the Republicans or Democrats completely controlled Congress, the average annual increase was 8.3% and 4.9%, respectively.
During the Republican presidency, US stocks performed best when Congress was divided.
As the backlash against data center construction intensifies, AI has steadily risen to become one of the hottest topics of this election season. This has forced investors to face rising regulatory risks brought about by this core technology, which has led the four-year bull market in US stocks.
Stuart Kaiser (Stuart Kaiser), head of US stock trading strategy at Citigroup Inc. (Citigroup Inc.), wrote in a note to clients earlier this week that a divided government would “force a stalemate or compromise,” pointing out that this is both the most likely and most positive outcome. “Under these circumstances, policy choices tend to be moderate, thus refocusing the stock market on the fundamentals of business and the economy.”
Kaiser suggests establishing bullish positions in the S&P 500 or Invesco QQQ Trust to reap surging profit gains from technology companies and benefit from the decline in election-related risk premiums.
The Delta One trading division of JPMorgan Chase & Co. (JPMorgan Chase & Co.) stated that if Congress falls into division, stocks benefiting from the Affordable Care Act (Affordable Care Act) will bring investment opportunities. The department also believes that traditional defense stocks will also benefit, as defense is currently a shared priority of both parties.
Be wary of a “complete sweep”: different election results affect the sector market
If unexpectedly, the current consensus on a “split parliament” gradually forms, but it also poses a risk: once market expectations suddenly shift to a sweep (sweep) for any party, the stock market may fluctuate sharply.
At least there is still a possibility that the Democratic Party will win both houses of the Senate and the House of Representatives in one fell swoop. Although President Donald Trump remains the Republican Party's biggest appeal, his record low approval rating is a major danger for the Republican Party to face the November election. The Republican Party hopes that a midterm conference, informally known as “Trumpapalooza,” will prevent a repetition of the fiasco that occurred during its first term.
Last month, the Bank of America Corp. (Bank of America Corp.) strategy team led by Michael Hartnett (Michael Hartnett) indicated that if Trump's party performs well and Greg Abbott (Greg Abbott) succeeds in re-election in Texas, it will be particularly beneficial to AI concept stocks. On the other hand, Hartnett believes that if the Democratic Party takes the Senate and defeats Abbott, the stock market will face a “sharp decline.”
Phil Wool (Phil Wool) of Rayliant Assets (Rayliant) believes that if the Republican Party achieves a Grand Slam, it may boost sectors that benefit from further deregulation. He pointed out that the energy and financial sectors are potential beneficiaries. And if there is a “blue storm” (Democratic Party overall victory), it could boost renewable energy and health-care providers.
However, there are also those who see the midterm elections as just a minor episode.
Omar Aguilar (Omar Aguilar), CEO of Schwab Asset Management (Schwab Asset Management), said that although political results always make customers uneasy and unsure, most results have little impact on the long-term trend of the market. Some sectors will be more volatile than others, but in the long run, this is an opportunity to adjust the asset allocation mix.
“Customers are watching closely, just as they are watching the $100 price of oil,” Aguilar said, “but does that mean they have to change their strategy? Our advice is always: No, just stay strong and have a good time.”