Mid-Term Elections & Your Portfolio
Politics is a game of uncertainty, and uncertainty can steer the global financial market. Mid-term elections are one such event that can significantly impact the stock market. There are numerous ways a midterm election may impact one’s investment portfolio.
- Market volatility. During the midterm election year, the stock market tends to experience greater-than-average volatility. This enhanced turbulence is often due to uncertainty about potential policy changes depending on the election's outcome. Investors may react to this uncertainty, making drastic shifts in their investment strategies.
- Sector performance. A potential change in the ruling party can affect certain sectors more than others. Parties usually have policy agendas that favor certain industries. For example, a party focused on clean energy may affect utility or energy sector stocks, whereas a party concerned about healthcare reform could impact healthcare company stocks. Investors need to keep an eye out for these sector-specific potential impacts.
- Market confidence. Investor sentiment, or market confidence, can be highly influential in an election year. Public sentiment about the economy can influence the stock market even if it's not based on hard data.
Does the dominant elected party affect stock market performance?
The party in power can indeed influence the stock market, but many other factors also come into play.
- Fiscal and monetary policies - The fiscal and monetary policies proposed or implemented by a political party can affect the market. For instance, a party aiming to reduce corporate taxes or encourage foreign investment could facilitate a bullish stock market.
- Trade policies - Trade policies can also impact market performance. Policies that encourage or discourage free trade can influence multinational corporations and, by extension, the stock market.
- Legislative impact - Legislation proposed or passed by the ruling party can affect specific industries. For instance, if a party passes laws favoring renewable energy, stocks in this sector could see a rise.
While these elements can influence the stock market, it is not always straightforward to predict the market direction based on which party is in power. Global factors, such as geopolitical events, economic indicators, and trade and tariff policies, can sway the market, often outweighing the influence of domestic politics.
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Last week, several leading AI executives called for a slowdown in development, citing concerns that increasingly powerful models could eventually pose significant risks if left unchecked. While the debate has focused on whether companies will continue to develop AI, last week’s 25bp rate hike also raises the question of whether they can continue to fund the AI race.
With the Federal Reserve unanimously raising the federal funds rate, corporate borrowing costs will likely move higher as well. The chart of the week examines which areas of the market are best positioned to absorb those higher financing costs. Looking at interest coverage ratios, a measure of a company's ability to meet interest payments from operating earnings, the Mag 7 stands out as particularly well positioned. Strong profitability and healthy balance sheets leave these companies with significant flexibility to increase borrowing and continue investing in growth, an increasingly valuable advantage as abundant cash flows become less of a tailwind. The picture is less favorable for the rest of the market. Compared to the Mag 7, many companies across the broader S&P 500, as well as mid- and small-cap stocks, have less capacity to absorb higher interest expenses, making them more vulnerable to a restrictive monetary environment.
For equities, higher rates could create headwinds for more rate-sensitive areas of the market. Higher borrowing costs can pressure corporate profit margins, while higher discount rates can weigh on equity valuations. However, tighter monetary policy is unlikely to significantly alter the outlook for mega-cap technology companies, as AI investment remains driven more by competitive positioning than financing costs. As a result, the AI investment cycle may remain largely intact despite higher rates, barring meaningful self-imposed restrictions or government regulation.
Chart of the Week: Source: Bloomberg, J.P. Morgan Asset Management. Mag 7 includes AAPL, AMZN, GOOGL/GOOG, META, MSFT, NVDA, and TSLA. The Russell Mid Cap is used for mid cap and the Russell 2000 is used for small cap.
Thought of the Week: Source: Bloomberg, J.P. Morgan Asset Management.
Abbreviations: Cons. Sent.: University of Michigan Consumer Sentiment Index; CPI: Consumer Price Index; EIA: Energy Information Agency; FHFA HPI: - Federal Housing Finance Authority House Price Index; FOMC: Federal Open Market Committee; GDP: gross domestic product; HPI: Home Price Index; HMI: Housing Market Index; ISM Mfg. Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally Adjusted Annual Rate
Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally
Adjusted Annual Rate
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Bond Returns: All returns represent total return. Index: Bloomberg US Aggregate; provided by: Bloomberg Capital. Index: Bloomberg Investment Grade Credit; provided by: Bloomberg Capital. Index: Bloomberg Municipal Bond 10 Yr; provided by: Blomberg Capital. Index: Bloomberg Capital High Yield Index; provided by: Bloomberg Capital.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Commodities: Gold, FactSet; Crude Oil (WTI), FactSet; Gasoline, FactSet; Natural Gas, FactSet; Silver, FactSet; Copper, FactSet; Corn, FactSet. Bloomberg Commodity Index (BBG Idx), Bloomberg Finance L.P.
information from FactSet's Pricing database as provided by MSCI. Russell 1000 Value Index,
Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R,
top to bottom are: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stock market, and
is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures
the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth values).
Past performance does not guarantee future results.
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