Should you buy or sell US stocks ahead of the US midterms?

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on Oct 20, 2022
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  • Equity investors prepare for the US midterm election scheduled in the first part of November
  • Historically, stocks rallied after midterms since 1958
  • Weakness in the stock market before the election day is not unusual

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Stock market investors await midterm elections in the United States as the event that might move the market. Scheduled on Tuesday, November 8, 2022, the midterm election historically moved the stock market.

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So should you buy or sell US stocks ahead of the election? What is at stake, and how did the markets behave in the past?

19 midterms held since World War II

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Every four years, the United States elects its President. Midterm elections take place between or two years after the presidential election.

This is a battle for the House of Representatives and the Senate. Who controls the two will have a big say in the internal and external policies of the United States.

Hence, the stock market tends to react strongly, depending on who will gain control on – Republicans or Democrats, or a mix between the two.

The first interesting thing from a historical perspective is that out of the 19 midterms held since World War II, except for 2002, the incumbent did not make gains in both the House and the Senate.

The big question at this year’s elections – will the Democrats be able to hold the House?  

Why are midterms important for the stock market?

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Depending on the outcome, the market participants begin pricing in the future policies to be pursued. For example, if the Democrats will have a sizeable presence, the market will be ton stimulatory policies for the US economy.

Given the inflationary pressures, the Federal Reserve will need to act to counter such policies, with higher interest rates to be held for longer.

This year is also particularly important because it will offer clues regarding the chances of Donald Trump, the previous US President, to regain the White House. The last time he was President, the United States pursued nationalist policies and reversed many of the external policies in place.

Odds are stocks will rally after the midterm elections

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The chances are that stocks will rally after the midterm elections. Historically, stocks have performed well, no matter the outcome.

This time is even more interesting because stocks have generally declined in the run-up to midterms (just as they did this year), and rallied after every midterm since 1958.

To sum up, midterms are bullish for stocks. Even the recent declines fall in the bullish pattern, so expect dips to be bought before election day.

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