The Democrats taking control of the House of Representatives isn’t good news for investors, according to Fundstrat Global Advisors.
Much has been written in recent weeks about how U.S. stocks usually perform well after midterm elections. However, data from Fundstrat, reported on by CNBC, shows that the relief rally is stymied when the majority party fails to maintain control of the House.
Fundstrat, using Dow Jones Industrial Average and S&P 500 data, revealed that the median stock market return since 1896 was 1.9% a year after the House majority changed from one party to another. That figure falls well shy of the 16.8% median return registered when the House majority stayed the same.
Tom Lee, co-founder of Fundstrat, told CNBC that a split congress is likely to weigh on U.S. markets, although he does not expect these concerns to register with investors until the start of next year. The closely followed strategist predicted that the initial reaction could be positive, particular as the equity rout in October appeared to have already priced in election uncertainty.
Lee claimed that the recent sell-off is “easily a recipe for a big bounce,” prompting him to estimate that the S&P 500 will rise 10% to 3,025 by the end of year.
Finally Some Clarity
Other researchers are equally bullish that stock markets are on course to recover following a difficult October. AI financial analytics firm Kensho, whose data shows that the S&P 500 has averaged a gain of 0.95% one week after the midterms since 1980, said investors will be grateful for the extra clarity the election presents.
With the midterms now over, Kensho noted that it will become clearer which policy initiatives Congress will pass through and which will be blocked, adding that certainty is appreciated by investors, even if some policies may not work in favor of corporate America.
Torsten Slok, chief international economist at Deutsche Bank, made a similar observation, telling CBS MoneyWatch that once the votes are tallied, "that uncertainty is eliminated, [and] we know what the playing field looks like.”
CBS also reported data disputing Fundstrat’s claims that stock markets underperform under a split congress. John Lynch, chief investment strategist at LPL Financial Research, told the broadcaster that the S&P 500 has generated an average return of 15% under a Republican president and a split Congress. "People focus so much on the election, but how much of the budget is fixed? 80, 85 percent," said Lynch.