The 2018 midterms are highly anticipated. In November, all 435 seats in the U.S. House of Representatives and 35 of 100 seats in the Senate will be contested.
According to Wells Fargo, May polls showed a likelihood of a Democratic takeover in the House while it is likely that the Republicans will hang on to a Senate majority. The bank said that congressional turnover is common in a U.S. president’s second year in office.
Either way, the bank is expecting markets to be higher by year-end.
Historically, political uncertainty leading up to midterm elections has led to greater market volatility, and this year has been no exception. Equity market corrections during midterm election years, like the one that occurred in 2018, have turned out to be buying opportunities.
“We continue to expect higher U.S. equity markets by year-end 2018, the bank said in a research note. “Periods of volatility can offer opportunities to invest in cyclical equity sectors that we favor, and in a variety of global asset classes to broaden portfolio diversification.”
Anticipating a potential change in control, Wells Fargo said: “Although a Republican majority in Washington, D.C., historically has been accompanied by strong equity-market performance, a potential split in Congress is unlikely to derail the U.S. equity bull market (in our view).”
The bank noted that from 1933 to 2016, the average return for the S&P 500 Index when Republicans held the presidency, House and Senate for the one year after midterms was 15.1%. When Democrats have been in complete control, the increase averaged 9.3%.
Regardless of a shift in power, Wells Fargo expects that the markets will end higher in 2018 than where they were at the end of August. The bank said a continuation of higher volatility will likely afford a chance for investors to lean into some of the asset classes that it views favorably.
Wells Fargo sees opportunities in cyclically oriented sectors such as consumer discretionary, financials and industrials, along with health care.
Commenting on the midterms and their impact on the markets, Ben Phillips, chief investment officer at Eventshares, told FOX Business: “If Republicans hold both the House and Senate, we don’t expect any major policy agenda changes. If Democrats win control of the House and the Senate, we would expect a much more confrontational policy environment. Under a Democrat sweep scenario, we think a few sectors could see strong stock performance – healthcare, clean energy, and consumer stocks, to name a few. Underperformers would likely be financials, energy, and defense stocks.”