US Midterms: A split government?

The US is the world's largest economy and financial market; with both parties having differing fiscal policies, the results of elections can be crucial to the markets.
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What the numbers show so far

Republicans are favoured to win both chambers of Congress following the midterm elections. The second most likely option is that Republicans gain control of the House, but Democrats manage to keep the Senate. Either way, control of both branches of government by one party is expected to end after the election. Given the balance of probabilities, markets are likely already pre-positioning, which could minimise the reaction as the results are known overnight and tomorrow.

Most Americans are concerned about the issue that directly implicates the markets: inflation. While Democrats campaign on social issues, including increased spending on things such as student loan forgiveness, Republicans position themselves as the "no more spending" party. Presumably, further mammoth spending bills such as the Inflation Reduction Act won't be forthcoming if Republicans gain control of at least one chamber of Congress.

How markets are expected to react

In the immediate aftermath of the election, markets can react to surprises. It's often not just who wins the majority but also what policies are announced immediately after. The new Congress won't start legislating until Jan 20 of next year, and there is often a flurry of activity from outgoing legislatures.

However, a split between Republicans controlling Congress and a Democrat President has historically translated into long-term gains in stocks, whether Republicans hold both or only one of the chambers. The expectation is that Republicans would curtail government spending, which could help reduce inflation. Markets might not be happy with the prospect of a form of austerity in the near term. Although markets have rallied in the subsequent years after a split government, the immediate reaction following the election has been necessarily positive. The full impact of the election outcome likely won't be felt until a few months later after the legislative priorities have been sorted out.

DJIA nears critical trendline

The Dow Jones appears to have completed a broadening wedge pattern of the descending fashion. If price breaks above the upper trendline, the top at 37k comes back on the radar, but if a top forms instead, the low at 28600 does.

In between levels, 33100 and 34k seem to be short and medium-term resistance levels below 35850. On the flip side, 31k and 30k are major swings to watch below the short-term support at 32k.

Key takeaways

The most likely outcome of the US midterm election is that Republicans will gain control of both the House and the Senate, but there is also a possibility that Democrats will keep control of the Senate. Control of both branches of government by one party is expected to end after the midterm elections in either case. Markets are likely to react positively to the news, as a split government has historically resulted in long-term stock gains.