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What’s at Stake in the Midterm Elections?

Wells Fargo Investment Institute - October 2018

All elections have economic and investment implications, and the upcoming U.S. midterm election is no different. Craig Holke, Investment Strategy Analyst with Wells Fargo Investment Institute, explains three possible scenarios—and what impact they could have on the markets. 

Transcript: Monthly Investment Outlook: What’s at Stake in the Midterm Elections?


What’s at stake in the midterm elections? 

All elections have economic and investment implications, and the upcoming U.S. midterm election is no different. Since the 2016 elections, the markets have responded well to Republican-led initiatives like tax reform and deregulation, but Republicans’ control of the House and Senate may be at risk.  Our current outlook for majority in the House is that we see a hotly contested race, with control of that body going to whoever holds at least 218 seats.  Likewise in the Senate, where today Republicans hold the slimmest of margins. If Democrats gain control of one or both chambers, we believe they will attempt to redirect current policy initiatives and slow forward movement on the Republicans tax and regulatory agenda. 

So, the big question is, what are the possible election outcomes, and what impact could they have on the markets? 

We see three possible scenarios. 

First, Republicans retain control of the House and Senate. We see a 30% probability of this scenario. 

Second, Democrats takeover the House and Senate. We see a 20% probability of this scenario. 

Third, and we believe most likely, will be a return to divided government—with Democrats taking back the House and Republicans retaining control of the Senate. We see a 50% probability of this scenario. 

Historically, the equity market has undergone corrections in anticipation of midterm elections, but once the uncertainty has been resolved following the election, the S&P 500 Index has historically outperformed—and it didn’t matter which party was in charge before or after the election. So, regardless of the outcome of the upcoming midterms, we believe investors should focus on solid economic fundamentals and make sure their investments are aligned with their long-term goals. 

For more details on the issues we believe could have the greatest impact on market reaction and investor portfolios, please download our Wells Fargo Investment Institute special in-depth report: 2018 Midterm Elections—What’s at Stake for Investors.