Here’s what Wall Street thinks will win the midterm election

Wall Street analysts are betting that Tuesday mid term election Congress’s control would be overturned, with potentially significant implications for the US economy.

History backs them up: The president’s party has lost between 25 and 30 House seats in nearly every modern midterm election. But this year, the economy is playing a bigger role. A recent Gallup poll found that the share of registered voters calling the economy “extremely important,” which they support at the ballot box, is at its second highest level in two decades.

What is making the picture worse this year is that the economy is showing mixed signs. a historical strong job market And the high rate of Americans starting businesses has coexisted with the highest inflation and rising energy costs since the early 1980s.

Poll by poll, Americans have cited rapidly rising prices of food, gasoline and housing as a major concern in the election. Fuel costs, in particular, have long been correlated with approval rating of person in the White House. While the prices at the pump have fallen Record-high level in JuneThey’re still about 40 cents a gallon more than a year ago for regular gas.

Analysts at Goldman Sachs recently wrote that one economic metric predicts higher-than-average losses for the Democratic Party. Real disposable personal income – or money left with people after taxes – has fallen sharply this year.

“We find that headline CPI and gas prices are roughly equal in their statistical significance for mid-term election results, but neither is a strong predictor of election results in the form of real disposable income growth, any compared to the previous year.” There has been a greater decline than in the mid-term elections since the data was introduced,” the investment bank said in a report.

Real wages have also declined since last year, as prices have risen faster than workers’ wages.

impact on stocks?

Regardless of whether the vote swings, history shows one outcome is almost certain: the stock market is likely to rise.

“Markets have historically performed well in the medium term post-year,” strategists at LPL Financial wrote on Monday. “In fact, they have grown to 18 out of 18 in the following year dating back to 1950, with nearly identical historical returns under Democratic and Republican presidents.

Financial markets also favor a divided government because the chances of comprehensive legislation being passed are dramatically reduced when opposing parties share power. And if pollsters’ predictions come to fruition and Republicans regain control of one or both houses of Congress, it may not freeze the Democrats’ legislative agenda.

Some analysts see a way out for limited legislation on areas the two sides agree on, such as deterring tech companies, strengthening antitrust enforcement, and regulating cryptocurrencies. With a divided Congress, however, Wall Street analysts expect Republicans to focus surveillance hearings and measures on social issues, such as abortion, public education, and trans women in sports, rather than legislation that would affect the economy. can be transferred appropriately.

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“Republicans in the House are likely to focus on ‘messaging bills’ that highlight differences between Republicans and Democrats, with little intention or expectation that they will pass a Democratic filibuster in the Senate or President Biden. are being signed into law,” an analyst at Benjamin Salisbury Height Securities said in a research note this week.

Since Congress would need to pass legislation to raise the loan limit early next year, there could be a showdown over the federal government’s borrowing limits, Salisbury noted. This could give a Republican-controlled House the advantage of seeking concessions on party priorities, including increasing military spending, funding a border wall, eliminating federal regulations and making the Trump-era Tax Cuts and Jobs Act permanent. Includes making.

Still, despite Republican opposition to recent Democratic victories, massive domestic infrastructure spending and increasing the IRS’s ability to go after tax fraud, “the Senate filibuster and the President’s cause of 180 degrees in 2023.” Chances of turn are extremely slim. Veto,” he said.

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The legislative deadlock in Washington would force the Biden administration to advance its priorities through personnel appointed in the first two years. These include the appointment of Mr. Biden with a Democratic majority on the Federal Trade Commission and the National Labor Relations Board, as well as Rohit Chopra’s appointment to head the Consumer Financial Protection Bureau.

Taken together, those regulators are likely to continue the administration’s pro-consumer agenda, taking a tougher line on regulation of corporate mergers, banks and financial products such as buy-now-pay-later loan and cryptocurrencies, according to Cowen analyst Jarrett Seeberg.

“The Republican majority on Capitol Hill can do nothing to stop the expected increase in bank capital requirements, tougher rules on consumer finance, changes in housing policy, oversight of crypto or the SEC’s climate change reporting, SPAC or regulations on market structure.” ,” They said. In a research note.

Seeberg expects the CFPB to push for lower credit card fees and bank overdraft fees, and reimburse consumers duped in Zelle payment scams.

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