Vice President Kamala Harris and former President Donald Trump will be the biggest story on election night. But keen investors will be watching other races, too.
While Vice President Kamala Harris and former President Donald Trump will consume the majority of headlines on election night, the stock market will also be paying attention to a slate of congressional races. Who wins the presidency is not the only thing that matters to investors. The president needs Congress to pass legislation and Congress can also override presidential vetoes. Additionally, the makeup of Congress has historically shown some correlation to market returns. Here are some key congressional races the broader stock market will be watching.
A spotlight on the House
Past elections have shown that polling and predictions heading into election night aren’t always correct, so either party could still win the U.S. House of Representatives and the Senate. But the Republicans are favored to take the Senate (according to some sources, as of Oct. 28). The website FiveThirtyEight, which uses polling, economic data, and demographic data to explore election outcomes, ran 1,000 simulations and found that Republicans win control of the Senate 88% of the time.
In the same analysis for the House, it’s much closer. FiveThirtyEight found that Republicans win control 52% of the time, meaning the House is essentially a toss-up, so I think the House will be of greater interest to investors on election night. According to the nonpartisan Cook Political Report, 25 House races are considered toss-ups, with either party having a good chance of winning. Below are the seats in those 25 races and the incumbents’ names. I bolded the names not seeking reelection for their seat in the House.
Democratic Incumbents
Republican Incumbents
- David Schweikert (AZ-01)
- Juan Ciscomani (AZ-06)
- John Duarte (CA-13)
- David Valadao (CA-22)
- Mike Garcia (CA-27)
- Ken Calvert (CA-41)
- Michelle Steel (CA-45)
- Mariannette Miller-Meeks (IA-01)
- Zach Nunn (IA-03)
- Don Bacon (NE-02)
- Anthony D’Esposito (NY-04)
- Marcus Molinaro (NY-19)
- Lori Chavez-DeRemer (OR-05)
- Scott Perry (PA-10)
New York is a key battleground state, meaning candidates from both major parties have a reasonable chance for victory. The Democrats have a chance to flip two Republican-held seats in the Empire State. Both parties will also be on defense because both the Democrats and Republicans have other New York races that are leaning their way but are not yet a lock, according to the Cook Political Report. Other states with notable toss-up races in the House include California, Arizona, Iowa, Pennsylvania, and Michigan.
Image source: Getty Images.
What will investors be looking for?
Everyone has different preferences for the outcomes of election night, and will be weighing different things when they vote. Many voters consider the economy the single most important election issue and will therefore be voting for the candidate they think is best for the economy. Many others won’t vote with the economy in mind because they are focused on other issues.
However, historical data suggests the market performs better when Congress is split, with the House in one party’s hands and the Senate in the other’s. So this would be your preference if you are investing unemotionally and solely focused on market returns. A split Congress has led to average annual returns of 17% for the S&P 500, according to one analysis, well above average annual returns for the broader benchmark index.
So if you agree with the pollsters that the Senate will be in Republican hands, you’ll be closely watching the above listed races to see if Democrats can triumph in them and win the House.
Voting for a situation that encourages political gridlock might be hard for people to wrap their heads around, because many people want to see change and think that partisan gridlock has been bad for the country. Congress is passing fewer laws today than in previous sessions.
However, analysts from LPL Financial indicate that investors might prefer gridlock because it makes sweeping changes that could impact individual sectors less likely. Furthermore, the corporate tax rate is at 21%, and investors won’t want to see this number increase.Â
Of course, different investors will have different preferences, depending on their investing strategy, but broadly speaking, the S&P 500 performs best under gridlock.