Best Midterm Election Scenarios for Stocks, Sectors to Play Them: RBC
If the midterm elections go as Wall Street expects, stocks should rally for the rest of the year, according to RBC. Voters go to the polls on Tuesday, and the consensus view is that Republicans will regain control of one or both chambers. “Conventional wisdom that the stock market loves political gridlock is supported by historical data in this case,” Lori Calvasina, RBC’s head of U.S. equity strategy, wrote in a note to clients on Monday. Average S&P 500 returns are higher in years when a Democrat is president and a Republican controls Congress, her analysis found. When Republicans held only one house, the index rose 14%; he got 13% when the GOP had full control of Congress. On the other hand, democratic action resulted in a 10 percent return, she said. Different Scenarios If Democrats retain control of Congress, it will have short-term negative effects on stocks because the GOP victory in at least one chamber is already priced into the market, Calvasina said. If Republicans win the House, S&P gains could be modest. The S&P is already up about 9% from its mid-October low, driven in large part by the shift in momentum from Republicans to Democrats seen in polling data, she said. The usual medium-term jump is 7.1%. However, there is precedent for further achievements, Calvasina said. This year is the most similar to 2002 – so far the S&P has had a 76% correlation with 2002, the strongest of any midterm election year in decades. By then, the S&P had recovered 20% from its October lows, she said. However, the biggest positive impact on the market would be the GOP gaining full control of Congress, she said. “The Republicans’ chances of taking back the Senate are generally seen as less than their chances of taking back the House,” she said. “If Republicans regain control of both chambers, capital market participants will see it as good momentum for Republicans heading into the 2024 presidential race.” Sectors to benefit Communications services, energy and industrials are likely to benefit the most from Republicans gaining control of at least one house of Congress, largely because of what it would mean for the regulatory back-end, according to RBC analysts. Within communications services, cable, telecom, media and internet/social media and search are poised to do well. Within energy, exploration and production should benefit the most, while refineries and midstream and master limited partnerships should also outperform. Within industries, RBC analysts are bullish on aeronautics, multi-industry and electrical equipment, rail and defense. In addition, biotech in healthcare and specialty/consumer finance and regional banks in financials should outperform, according to RBC. — CNBC’s Michael Bloom contributed reporting.
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