America’s midterm magic to support stocks in US and Singapore
DESPITE 2022’s stomach-turning volatility, now is a time to look forward. Right ahead is a regularly bullish event: America’s upcoming Congressional midterm elections are underappreciated stock market rocket fuel. Indirectly, Singapore’s stocks could benefit hugely from the legislative gridlock they bring.
Unlike Singapore’s Parliament, America’s legislature has a lower and upper house: the “House of Representatives” and “Senate,” respectively. All 435 “House” seats are up for re-election every other November. This year, 35 of 100 Senate seats are up.
President Joe Biden’s Democrats now control both chambers. But 6 seats flipping Republican would shift control to the Republicans in the House.
Midterm behavioural patterns make such an outcome overwhelmingly likely. Since 1945, the president’s party has lost House seats in all midterms but 2. Unpopular United States presidents average 38 seats lost. While I doubt the Republicans will gain quite that many this time, as they took many easy-to-win seats in 2020, Biden’s dismal 44 per cent approval rating suggests the Republicans should still wrest control – creating the formal gridlock that is always bullish for stocks.
The Senate is murkier. It is now 50-50. Vice President Kamala Harris by rule breaks ties, favouring Democrats. One seat could flip control. But only 5 seats are really in question, and the races are highly personal; so, any darned thing could happen with those 5.
Since 2021, thin majorities have let Democrats pass big spending bills and fund their regulatory goals—barely. The party controlling each chamber dictates which bills actually get voted upon, keeping uncertainty high. Republicans’ taking either chamber thwarts that. Nothing huge passes, creating gridlock.
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Stocks love it. They don’t prefer either party, but hate major legislation. As I explained in May, sweeping changes create winners and losers. And behavioural psychology shows people hate losing hugely more than they like winning. Hence, uncertainty rises. Gridlock ends that. Knowing rules can’t change much, businesses can plan and deploy longer-term capital more confidently. Investors feel more comfortable taking risks.
Perhaps gridlock’s bullishness seems unusual to you, given Singapore’s long history of single-party control and overall rising markets. But America’s regular election cycle and long series of good historical data prove it.
Since 1925, America’s S&P 500 has been flattish in midterm years’ first 3 quarters (in US dollars). Unlike Singapore, American elections are voluntary. Politicians use big promises and hot, vitriolic campaign rhetoric to motivate their base—roiling sentiment. As Election Day nears, stocks begin pre-pricing the likely resulting gridlock. Hence, US stocks average 6.3 per cent gains in the final quarters of midterm years, rising in 83.3 per cent of them.
The gains don’t stop there. Returns average 6.6 per cent in the ensuing Q1 and 5.5 per cent in Q2. Returns were positive in 87.5 per cent of both quarters—midterm magic.
That is in America. The good news: Tightly correlated developed markets mean Singapore’s stocks benefit from America’s reliable midterm magic. The STI and S&P 500 have a correlation of 0.60—strong, given 1.0 is lockstep movement and -1.0 polar opposite. Hence, since the first midterm with good STI data in 1970, Singapore’s stocks have floundered through September of midterm years—averaging 0.3 per cent in Q1, followed by -1.3 per cent and -4.0 per cent in the subsequent two quarters. They rise less than half the time—19 of 41 quarters. Then, Singapore stocks surge alongside America’s. They average 6.6 per cent in midterm Q4s, rising 61.5 per cent of the time. In the ensuing quarters, the STI averages 11.7 per cent and 7.5 per cent gains and returns are positive in 77 per cent of both quarters. Even without 1975’s huge 68 per cent rise, post-midterm Q1s average 7.5 per cent.
That same trend runs internationally—meaning Singaporean investors who shop globally likely also benefit from midterms’ magic. Consider the eurozone: Good data for the 19-nation bloc start in 1988. Since then, returns average -3.4 per cent in US midterm years’ first 3 quarters. Those 3 quarters are positive only 35 per cent of the time. That flips to a 2.9 per cent gain in Q4, then 3.2 per cent in both the following Q1 and Q2.
Of course, gridlock’s absence or presence doesn’t singularly dictate markets’ direction. But if history holds and the Republicans take either of America’s 2 legislative chambers, that should quell extant political fears in the world’s largest economy and stock market.
Today, with markets having pre-priced wide-ranging fears ad nauseam—whilst sentiment is extremely dire—US gridlock should help power a relief rally. Singapore stocks’ bounce off mid-July’s lows may be the start. Regardless, position now to reap its rewards.
The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally.
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