Reduce the risk of midterm elections

  • Stock market investors will soon turn their attention to the US midterm elections, says Barclays.
  • “The tide appears to have turned in favor of Democrats to maintain their majority in the Senate,” the bench said.
  • Barclays said that regardless of the election results, shares are poised to rise at the end of the year.

Stock market investors winding down their August summer break are still thinking about high inflation and the Federal Reserve’s response to rapid and large rate hikes, but it’s not too early to start mitigating risks before the US election in November be held, says Barclays.

“Beware of increasing political uncertainty in the US [as] political developments in the US midterms could take center stage,” analysts led by Emmanuel Cau, head of European equity strategy at Barclays, said in a note published Friday.

Markets are still mostly focused on how big the Fed’s rate hike will be in September as it continues to battle hot inflation. Investors will see if Fed Chair Jerome Powell will echo other Fed officials during his Jackson Hole speech next Friday by being open to another quarter-point raise.

But Barclays signaled a change in voting sentiment on PredictIt, a platform used to bet on election results.

“The tide appears to have turned in favor of Democrats to maintain their majority in the Senate,” the note said. In the Senate, 35 of the chamber’s 100 seats will be contested.

“The wide margin that Republicans have enjoyed all year has begun to narrow since late June, which may be due to falling gasoline prices and a still-resilient labor market that is boosting support for Democrats,” the investment bank said.

US President Joe Biden’s top labor official praised the July jobs report, saying it points to the US economy’s ability to avoid a recession. Last month, 528,000 jobs were added, more than double economists’ expectations. Meanwhile, average gas prices across the country have fallen below $4 a gallon for the first time since March, according to motorcycle club AAA.

Biden also won a tense legislative victory in passing the Inflation Reduction Act. The bill he signed this week earmarked $370 billion for climate and energy programs, among other things.

Barclays said his market analysis of the past few years of midterm elections over the past 100 years shows that stocks tend to underperform on the ballot. Regardless of the outcome, however, stock performance improves after the election contests are over.

“[If] history repeats itself, investors must reduce risk until the November elections and then position themselves for a year-end rally,” said Barclays.

Midterm elections will be held on November 8. In addition to the Senate races, all 435 seats in the House of Representatives must be voted on.

To that end, the Federal Open Market Committee will meet on September 20-21. Policymakers can settle for a 50 basis point rate hike, or they can decide on a third consecutive and sharp hike of 75 basis points, bringing the Fed Funds rate within a range of 3% to 3.25%. Inflation was 8.5% in July.

Add a Comment

Your email address will not be published.