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A big night for Republicans on Tuesday could fuel a short-term pop for stocks and help keep alive what’s likely to be another bear-market rally, according to a Wall Street analyst who correctly called this year’s equity selloff.
Mike Wilson, Morgan Stanley’s chief equity strategist, remains bearish over the long term for stocks but has an upside target in the 4,000-to-4,150 range for the S&P 500
SPX,
which has bounced since setting a 2022 closing low of 3,577.03 on Oct. 12. The index rose 1% to end at 3,806.80 on Monday, after stocks suffered a decline last week. The Dow Jones Industrial Average
DJIA,
rose more than 420 points, or 1.3%, while the Nasdaq Composite
COMP,
advanced 0.9%.
Wilson said a continued decline in bond-market volatility and a pullback in longer-dated Treasury yields could provide the catalyst for a test of the bank’s upside targets, though the rally itself is unlikely to be sustained.
When it comes to longer-dated yields, midterm elections could “provide a potential catalyst … if the Republicans win decisive control of both the House and Senate as some polls and betting markets are suggesting,” Wilson wrote. “Because this is
purely a tactical trading view and not in line with our core fundamental view, which
remains bearish, we will remain disciplined on how much leash to give it.”
The midterm elections will determine control of Congress. Democrats currently hold a slim House majority and control the 50-50 Senate through the tie-breaking vote of Vice President Kamala Harris. Polls indicate Republicans are likely to take control of the House and could also win control of the Senate.
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A Republican takeover of at least one chamber of Congress is seen as a potential plus for long-dated Treasurys, potentially pulling down yields, which move in the opposite direction of price. That’s because Republicans would likely “throw a wrench into the aggressive fiscal spending plans the Democrats would still like to get done,” Wilson wrote.
Republican control of either chamber could also reignite a battle over the debt ceiling.
More broadly, analysts have looked for equities to get a seasonal boost once voters have gone to the polls.
“Markets historically have done well in the year after midterms. In fact, they have been higher 18 out of 18 times in the following year dating back to 1950, with nearly identical historical returns under Democratic and Republican presidents,” wrote LPL strategists Barry Gilbert and Jeffrey Buchbinder in a Monday note (see below).
LPL Financial
“This is no guarantee that it will happen this time, of course, and remember, the S&P 500 has been higher about 80% of all years over that span, so 18 out of 18 is only somewhat above expectations,” they cautioned.
They noted that going back to 1951, a Democratic president with either a Republican or a split Congress — the two most likely outcomes this election — has seen an average S&P 500 Index return of over 17%, compared with an overall average of just over 12%. A split Congress with a Republican president has also seen strong returns.
The exception to a mixed government being favorable for stocks, they said, has been the combination of a Republican president and a Democratic Congress, as was the case for most of the Eisenhower administration, as well as under Richard Nixon and Gerald Ford. That’s not a potential combination voters and investors currently face.
There are several possible fundamental reasons for market strength following midterm elections, the analysts wrote. The main one is that uncertainty associated with the election is over. In addition, midterms usually provide something of a course correction from presidential elections, given that the party that controls the White House usually loses ground, and markets may anticipate prospects of a better policy balance ahead, regardless of who is in the Oval Office, they said.
