In the run-up to the US congressional elections on 3 November, the issue of affordability has moved to the centre of economic developments. Rising interest rates are making property purchases considerably more difficult, whilst high rents in many areas and increasing costs for energy and food are weighing on private households. According to Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM, the vote is turning into a de facto referendum on inflation and the cost of living. For financial and investment markets, the decisive factor is not so much the actual election winner as the impending end to political uncertainty.
The starting position for the Republicans looks challenging. They currently hold a majority of 53 to 47 seats in the Senate and have a narrow lead of five mandates in the House of Representatives with 218 representatives. In nationwide polling, the generic ballot, the Democrats led by eight to nine points in early October. At the same time, President Trump's approval rating stands at just 37 to 38 percent, driven in part by the conflict with Iran that has pushed up oil prices. Prediction markets and the Cook Political Report point to a likely change of majority in the House of Representatives, whilst the race for the Senate remains open, with slight advantages for the Republicans.
Fiscal risks and three parliamentary scenarios
Three constellations are emerging for future legislation. A divided government with a Democratic House of Representatives and a Republican Senate is considered the most likely outcome, which would result in political gridlock and tough budget negotiations. If the Democrats win both chambers, pressure on tariff and Middle East policy would increase, although the presidential veto power remains in place. Retention of both chambers by the Republicans would continue deregulation and tax cuts, supporting cyclical stocks. Regardless of the outcome, the risk of a budget dispute remains: the deficit recently stood at six percent of economic output, and interim funding for the federal budget ends as early as 11 December.
Historical cyclicity of financial markets and sector effects
Historical data from Carson Investment Research shows that in midterm years since 1950, the S&P 500 experienced an interim decline of 17.5 percent on average, followed by a recovery averaging 16.6 percent within twelve months after the election. Although this cyclical pullback did not occur in the current year given high interest rates, geopolitical conflicts and elevated valuations, the index has historically never closed in negative territory twelve months after the vote. Fischer emphasises that investors should factor in short-term fluctuations before the election, whilst sound entry opportunities traditionally emerge in the weeks following the vote.
At the sector level, differentiated perspectives emerge. Whilst financial institutions rely on the Republicans retaining the Senate to continue deregulation, the performance of energy stocks depends on political measures to curb oil prices. Renewable energies could benefit from Democratic majorities, but remain constrained by presidential vetoes. Whilst regulatory risks surrounding pharmaceutical prices exist across party lines in the healthcare sector, the defence sector proves stable due to broad political consensus on high defence spending.
