📢 Midterm US elections key facts!

🔜What You need to know before November 8! How will market react?

In this article, You will find:

1. What are midterm elections?

2. Key issues for Americans

3. Expectations regarding  election results

4. Will Trump return?

5. How the market reacted in the past?

6. What markets are worth paying attention to?

7. Key companies and sectors

Midterm elections in the United States will be held on Tuesday, November 8, 2022. The name of these elections comes from the fact that they are held in the middle of the US president's term. Next week, American votes will have an impact on distribution of power in Congress. Midterms are a kind of evaluation of the performance of the current government and, above all, the current president. Will the Democrats stay in power? Will Biden get a mandate to continue his policies? Who will Americans elect on November 8?

• The entire House of Representatives consists of 435 seats, where members are elected for two-years terms. In order to have a majority, Democrats need to secure 218 seats.

• About 1/3 of the Senate seats out of 100, and this year specifically 35 seats, where the term of office is 6 years. To have a majority, 51 seats are enough, or in the case of a party vice president, 50 seats are enough (as the Senate state currently stands)

• 39 governors in the states and other local authorities

Midterm elections tend to be far less popular compared to presidential elections during which Congressional elections are also held. Turnout is lower, but the election often reflects the public's sentiment toward the current president. Given the history of the last few decades, almost always the party of the incumbent president has lost the midterm elections. Will this be the case this time as well?

A key question is whether the Republicans will take at least one chamber in Congress, although as the election date approaches, dissatisfaction among Americans is growing, while the chances of former President Donald Trump's party taking control of both chambers are increasing. 

Key issues for Americans

Economy

By far the biggest problem for Democrats is rising inflation in the United States and growing public discontent. Biden has lost voters' confidence as fuel prices rose sharply. The president has tried to lower fuel prices, which has been partially successful. Prices for a gallon of gasoline fell from more than $5 to below $4, but this still did not significantly reduce public discontent or inflation and increased the chances of victory for the Republican Party.

Rising inflation means rising desaprobate for current US president, Joe Biden. Source: RealClearPolitics, Bloomberg, XTB

Abortion

June 2022 saw the revocation of a 1973 Supreme Court decision that made abortion legal throughout the United States. By overturning this decision, more conservative states could opt for more restrictive laws or even ban abortion. In response, Democrats are trying to pass a federal law that would protect the right to abortion in the United States. In order to achieve this goal the current administration needs 60 votes in the Senate, which is almost impossible to achieve at this point. Republicans want abortion laws to be regulated at the state level.

Immigration

Republicans oppose Biden and Democrats' decisions to remove parts of Donald Trump's anti-immigration policies. The Republican Party governors of Texas, Arizona and Florida have decided to controversially transport immigrants from southern states to the north, a decision that has received considerable media attention and criticism from the White House.

The state of democracy

Democrats believe that the return of the Republicans, and Trump in particular, to the presidency in 2024 could mean authoritarian rule. It is worth mentioning that Trump has repeatedly pressed state legislatures, the Justice Department and his vice president not to recognize the results of the 2020 election.

Climate

Democrats want to take further steps directed at combating the climate crisis, although it's worth mentioning that Biden himself is currently pushing oil companies to increase production in the country. A Republican comeback could mean more investment in the oil, gas or coal markets.

Key divergences in US parties. Source: XTB

Expectations for election results

Looking at the history of midterm elections, voters were reluctant to vote for the current ruling party. Looking at the last 100 years of history, the ruling party lost about 18-25 seats in the House of Representatives and 3-4 seats in the Senate! If history were to repeat itself, the Democrats could lose both chambers in Congress. What are the possible scenarios?The fight for the House seems to be settled, so the final battle will be fought for the Senate. Source: US Congress, RealClearPolitics, XTB

Scenario No. 1 - Republicans take over the entire Congress

Looking at the current situation, the Republicans only need to take over a few seats in the House of Representatives and one seat in the Senate to take over the entire Congress. The market is pricing the probability of such a scenario at nearly 75%!

What does this mean for the market?

Most likely, it will mean a full blockage of President Joe Biden's agenda and probably the absence of any new spending initiatives until the next presidential election. It can be expected that the green agenda will cease to be a priority for the authorities and no major tax change - especially one aimed at increases - will be considered. Moreover, Republicans have recently indicated that in case of their victory, Congress will no longer look so favorably on further Ukrainian support packages. If Biden blocks any ideas from the Republicans, the next two years will be a standstill for the US economy. Nonetheless, Republicans will push for increased cyber-security and increased defense spending.

Scenario #2 - A divided Congress

In this scenario, we rather consider a House taken over by the Republicans and a majority in the Senate retained by the Democrats. The market sees this scenario as 5 times more likely than with the House on the Democratic side and the Senate in the hands of the Republicans. However, it is worth remembering that in recent years polls have underestimated support for the Democrats.

What does this mean for the market?

This scenario means the fewest possible new legislative initiatives, although at the same time it is worth focusing on issues that are supported by both parties. These include regulation of technology companies or the cryptocurrency market. In theory, one could also expect some cooperation on investment projects in the energy market. Nevertheless, the same issues would be developed to a greater extent in the event of a full victory for the Democrats.

Scenario 3 - Democrats hold the entire Congress

History and polls indicate that the chances of this scenario are very low. The implied probability of this scenario is less than 10% according to market experts. Nevertheless, it is worth noting that the vast majority of senators are changing hands from the Republican side, which gives the Democrats a chance to maintain power. On the other hand, the recent drop in energy prices may provide some support for the Democrats in the elections to the House of Representatives.

What does this mean for the market?

Full flexibility and great potential for continued changes in the economy. Biden will have the opportunity to show voters that should give him another chance in the next elections. On the other hand, one can also see a certain split within the Democratic Party itself, which can be seen especially in the case of continued support for Ukraine or also huge programs to support the economy. This scenario assumes continued sizable spending.

Will Trump return?

The presidential election is still a long way off, but Trump has announced that he will seek re-election in 2024. On the other hand, Mike Pence, the vice president at Trump's side, has indicated that he does not know whether he will support him in the 2024 election. This could mean that Pence himself does not rule participating in the presidential race. 

At this point, disapproval of President Biden is high enough to consider the possibility that the Republicans and Trump will win next elections, even though the latter lost the last presidential election in 2020 by as much as 7 million votes. However, if inflation remains a problem and the US economy enters a recession a full power shift in the US is not out of the question. In that case, attention would have to be paid to the oil and gas sector, the arms sector and a possible renewal of the full-scale trade war with China. 

How did the market react statistically?

Statistics are strongly evident in analyzing the behavior of the stock market before and after the midterm elections in the United States. Statistics tell us that before the election, the S&P 500 index usually lost or barely moved. What's more, if we analyze only the corrections during the election year, we find that the deeper the correction was initially, the greater the rebound 12 months after the election!During each midterm election year, the S&P 500 scored a fairly deep correction, but a sizable rebound was observed 12 months once the markets reached bottom. The statistic also says that the upward momentum has accelerated since the election date. Source: Bairdwealth, Bloomberg, XTB

What else do the statistics say?

• Analyzing midterm elections since World War II, in 80% of cases US indexes gained during the election quarter compared to previous quarters

• Statistically, the best case scenario for the stock market was a divided Congress with a Democratic president (analysis of 1926-2019)

• The average rebound 12 months after the midterm elections reached 14.52% if the incumbent president's party remained in power (47 cases)

• Average increase of 15.94% in the case of a divisive Congress with a Democratic president (14 cases)

• An average increase of 6.99% in the case of a divided Congress with a Republican president (33 cases)

What markets do you need to pay attention to?

US500

When it comes to equity markets, the uncertainty surrounding the upcoming election has had a greater impact on the indexes than the outcome itself. Wall Street indexes performed differently in the months leading up to the election, but the S&P 500 gained in the 12 months following the election in every case since 1942. Returns were slightly higher when midterm elections led to a split in power between Democrats and Republicans. Such an outcome reduces the risk of major reforms, thereby reducing uncertainty about business or tax regulations. If this historical trend were to continue, a Republican win could be received more warmly by investors than keeping full power in the hands of the Democrats.

US500 has scored a similar correction from its highs as during the onset of the pandemonium. Will the statistics associated with the midterm elections work this time as well? Source: xStation5

Dollar

The U.S. dollar weakened at the beginning of Trump's and the Republicans' rule in 2016, but eventually EURUSD slid from 1.10 to below 1.05. The financial market believed that Trump's policies would lead to higher inflation, which would prompt the Federal Reserve to raise rates sharply. Trump has been unable to make up his mind throughout his term whether he supports a stronger or weaker dollar, and has tried to suggest changes in monetary policy to be more lenient in order to stimulate the economy ahead of the 2020 elections. 

Both parties are trying to strengthen the economy, but historically under the Republicans we have seen tighter monetary policy. On the other hand, U.S. researchers have concluded that a Republican presidency usually begins when the dollar is strong, which then weakened during their mandate. For the Democrats, on the other hand, the situation is reversed - the dollar is weak at the beginning and ends up in a very strong position. It can be said that this principle has worked well in recent years. Could this mean that the return of Republicans to power would end the dollar's dominance in the medium and long term?
Will the Republicans' rise to power herald the end of the dollar's dominance? In 2014, the dollar strengthened even before Trump was elected president. On the other hand, the dollar is currently at a level not seen since 2002. Source: xStation5

Oil

Oil is by far the most politically sensitive commodity in the world. The takeover of power by the Democrats and Biden was supposed to herald the end of fossil fuels in the US. However, this situation has changed due to the current energy crisis. On the other hand, history has shown that Trump has definitely done a better job with OPEC than Biden. Democrats in power could mean a further reduction in supply, while Republicans could increase supply in the future and support for US producers. Both of the last two presidencies contributed at least initially to higher oil prices. Biden wants lower fuel prices, but after the election there will be no pressure to further release oil reserves. Biden also announced that reserves would be rebuilt at prices lower than $70 per barrel. Source: xStation5

Key companies and sectors

Scenario No. 1 - Republicans take over the House of Representatives

The most likely scenario during this year's midterm elections is a Republican victory, so we will devote most of our attention to this scenario in this material.

Growing importance of cyber security

The sharply rising number of cyber threats from China, Russia and North Korea, among others, is increasing the vigilance of US authorities which may affect future government spending in this area. According to the Identity Theft Resource Center, the number of data breaches set a new record in 2021, with incidents up 68% from 2020 and 23% from the previous high in 2017. Data breaches rose another 14% year-over-year in the first quarter of 2022. Global spending on cybersecurity is expected to exceed $170 billion in 2022 (up about 13% from 2021) and is likely to remain a fast-growing industry for many years to come.

Defense spending in focus for Republicans

Even in a divided Congress, there may be room for bipartisan cooperation on several key aspects. One such area is defense. From 2000 to 2020, China increased its annual defense spending by 513%, while U.S. spending increased by only 64%. This raises an interesting prospect for U.S. aerospace and defense stocks, which are highly correlated with U.S. defense spending.

Companies that stand to gain from a Republicans victory

Akamai (AKAM.US)

As a content delivery network (CDN), Akamai ensures that content arrives safely at its destination. With the ever-increasing amount of data being sent over the internet, CDNs are becoming increasingly important. More people than ever are using the Internet for everything from entertainment to work. To strengthen its network security offerings and protect its customers from ransomware attacks, Akamai acquired Israeli company Guardicore in 2021 and cloud infrastructure platform Linode in early 2022.

Fortinet (FTNT.US)

Fortinet is one of the world's largest cybersecurity companies when it comes to revenue and capitalization. Like Palo Alto Networks, the company maintains double-digit growth and is highly profitable. Unlike Palo Alto Networks, Fortinet has invested in organic growth in cloud security. One of the company's achievements is its recently announced Internet security product. The company also signed a partnership with a Singapore-based quantum engineering program to develop next-generation security. Fortinet is also a leading provider of firewall services.

Datadog (DDOG.US)

Datadog, a cloud-native platform, is built to collect, monitor and gain insight into data and operations in the cloud. The company uses artificial intelligence to help automate the process of monitoring large and complex data sets, easing the burden on busy IT teams. It is also steadily expanding the capabilities of its platform with new modules that include security and data monitoring in the cloud.

Lockheed Martin Corp. (LMT.US)

Lockheed Martin is the undisputed leader in the US defense industry. The company also holds long-standing government contracts to supply military equipment. The F-35 jet it produces, which accounts for 30% of the company's revenue, is expected to remain in service until 2070. With a market capitalization of more than $117 billion, Lockheed Martin is a symbol of the industry, with current P/E = 20.54 a dividend yield = 2.70%.

Raytheon Technologies Corp. (RTX.US)

Raytheon, like Lockheed, is a leading contractor and provider of services related to the defense industry. Its position in the defense sector is linked to the Stinger anti-aircraft missile program. The United States has transferred a large part of its existing stockpile to Ukraine and European allies, leading to a significant depletion of Stinger missile reserves. The United States has signed a new $625 million contract with Raytheon to replenish its stockpile of these key missiles.

Textron Inc (TXT.US)

Textron is a company that manufactures civilian and military helicopters and business jets. Despite the drastic sell-off of the company's shares due to the COVID-19 pandemic, a significant opportunity to improve its performance emerged in the form of Future Attack Reconnaissance Aircraft program. Textron is competing with Lockheed Martin for a lucrative contract with the U.S. Army, with the winner to be determined in 2023. Opportunities for future deals with the Navy and Marines are also opening up for Textron.

Companies likely to lose from Republicans victory

The currently ruling Democratic Party has pushed through the Chips and Science ACT, a bill that would support the US semiconductor market with nearly $52 billion to be spent on research and rebuilding the chip industry in the US. The bill has been met with criticism from Republicans. We can guess that their victory in the midterm elections is likely to be met with a negative reaction from U.S. chipmakers, although the need to gradually move chip production from Taiwan to the U.S. seems more legitimate than ever. 

Advanced Micro Devices (AMD.US)

The company has a well-diversified business providing software in both the processor and GPU markets, with both markets ranking second behind Intel and Nvidia, respectively. The company has long-term agreements with Microsoft and Sony. The company's gaming sector grew 32% y/y despite a slowdown in the technology market. Sales forecasts for the console market remain optimistic, with both Microsoft and Sony expecting higher sales of the PlayStation 5 and Xbox.

Nvidia (NVDA.US)

The company is AMD's main competitor, and despite the similarities of the two companies, Nvidia's graphics chip technology seems by many to be marginally better (although more expensive). The semiconductor market has recently faced the specter of stagnation in China, after the US has imposed sanctions on advanced technology exports. However, Nvidia has confirmed that the US government will allow it to continue development of its H100 artificial intelligence chip in China. The company's recent results have not been optimistic, with the end of the Covid boom (which supported the computerization of remote work), a decline in crypto mining activity which led to lower margins from its RTX graphics chips

Scenario #2 - Democrats retain power in the House of Representatives

With the Democrats' focus on increasing  investment in renewable energy sources, this sector could prove to be the main beneficiary of their eventual victory.

Companies that stand to gain from a Democrats victory

NextEra Energy Inc (NEE.US)

NextEra Energy is the world's largest renewable energy company. In addition to solar and wind power generation, NextEra is involved in green hydrogen and energy banks. NextEra's regulated utility segment mainly engages in the generation, transmission, distribution and sale of electricity in Florida. Another segment produces electricity from clean and renewable sources, including wind and solar.

Enphase Energy Inc (ENPH.US)

Enphase Energy designs, develops, manufactures and sells microinverter systems for the photovoltaic industry. These devices convert the DC power generated by solar panels into AC power used by home appliances or sent to the electrical network.

The companies that manufacture these devices are key to the development of the solar energy industry. ENPH continues to develop its technology offerings, including state-of-the-art microinverters, energy banks, EV charging and home energy management software. 

Ormat Technologies Inc (ORA.US)

This company develops, builds, owns and operates geothermal, solar and other power plants based on recoverable energy. Recoverable energy power plants take waste heat from industrial processes and convert it into electricity.

Ormat's customers include utilities, which ensures the company's revenue stability. In its recent presentation to investors, the company pointed to the Inflation Reduction Act's extension of tax credits for geothermal and solar energy for projects starting before January 1, 2025.

Piedmont Lithium (PLL.US)

Piedmont Lithium is developing projects in North Carolina and Tennessee and has economic interests in lithium companies in Canada and Ghana. McKinsey & Co. predicts that demand will increase from about 500,000 tons of lithium carbonate last year to 3-4 million tons in 2030. Lithium prices have risen by several hundred percent over the past several months. With higher prices and the prospect of increased demand, there is a growing pressure to develop new supplies of lithium, which is mainly mined in Australia, Latin America and China, but can also be mined in the US. 

The company has a supply agreement with electric vehicle giant Tesla (TSLA.US), but it also faces the risk that North Carolina may not issue the needed permit to start mining operations.

First Solar Inc (FSLR.US)

Incentives introduced by the Inflation Reduction Act for domestic solar production and a 10-year extension of the solar credit period could benefit First Solar, pointing to its differentiated thin-film panel technology, existing manufacturing presence in the US and multi-year forward contracts. The solar cells produced by the company are based on cadmium and telluride, rather than polysilicon, which is experiencing a global shortage.

Companies that stand to lose from a Democrat’s victory

However, there are several sectors that the Democrats still have little sympathy for. There are two business sectors that sharply divide Democrats and Republicans. These include the oil and gas sector and the aforementioned renewable energy. Not many Democrats support domestic oil and gas companies. As a result, if the Democrats gain control of the House, the party could take actions that would significantly harm US oil and gas companies.

Exxon Mobil (XOM.US)

The Democrats' dislike of conventional energy-related companies could, for example, manifest itself in imposing new taxes on the sector, using the Clean Air Act to further restrict the production of gasoline-powered vehicles, and announcing that certain parts of the U.S. coastline are off-limits to drilling. This, in turn, could negatively affect the shares of oil giants such as Exxon Mobil.

Occidental Petroleum (OXY.US)

Occidental Petroleum's drilling programs are largely concentrated in US territory. Therefore, any action by Democrats to restrict drilling in the US and raise taxes on oil producers would likely have a much greater impact on Occidental than on XOM. Congressional Democrats have even tried to force the Fed to get U.S. banks to stop lending funds to oil companies.

CME Group (CME.US)

If inflation remains a problem and the Democrats retain total control of Congress, they may look for ways to curb speculation on commodities markets. This would be a significant negative factor for CME Group, which operates exchanges that facilitate the purchase of commodities, including many types of agricultural crops. Some on the left and many congressional Democrats argue that inflation is at least partly driven by Wall Street speculators. If inflation remains high and the Democrats retain control of Congress, they could seek to limit commodity speculation by Wall Street investors, which could significantly harm the CME Group.