The completion of today’s midterm elections may begin to stabilize stock-market volatility that has undermined an otherwise white-hot U.S. economy, analysts and investors say.
In the past month, both the S&P 500 and the Nasdaq dropped 5 percent, while the Dow Jones industrial average slid 4 percent, erasing much of the gains made in the indexes since the start of 2018 as President Trump’s tariffs slowed growth and interest rates climbed.
Some fluctuations were unavoidable, analysts say. Stocks tend to be more volatile in October and September, and during significant market-moving events like corporate earnings or an election. The tension around this year’s midterm elections, which news outlets and partisans on both sides have characterized as a referendum on Trump, has likely exacerbated some of that fluidity.
The market is largely prepared for a scenario in which Democrats regain control of the U.S. House of Representatives while the GOP retains power in the Senate, possibly picking up additional seats.
“For the most part in the market, it’s going to be a non-event,” Randy Frederick, vice president for trading at the Schwab Center for Financial Research, told the Washington Examiner. “After the midterms are over, we’ll see volatility start to go down toward more normal levels.”
Most experts believe gridlock in Washington, D.C., reduces swings in the stock market.
“That gives the market some certainty,” Peter Donisanu, an investment strategy analyst, said in a recent interview. “When we’ve seen turnovers to mixed chambers, we actually see market performance be positive in the years after.”
Under GOP control of both Congress and the White House, the markets have boomed, largely due to deregulation efforts and the Republican-led tax cuts, which permanently lowered the top corporate rate to 21 percent and temporarily reduced individual obligations.
The 28 percent gain in the S&P 500 during President Trump’s first two-year term is the second-highest in the past 80 years, surpassed only by the 29 percent increase during former President Dwight Eisenhower’s first term, according to Frederick’s analysis.
An outcome in which Republicans maintain their congressional majorities and can build upon those policies is “the most bullish scenario we could have,” he said.
A less volatile market, however, might bolster top U.S. companies, many of which have seen their stock price sag despite better-than-expected third-quarter earnings.
Of the 80 percent of S&P 500 companies that have reported so far this quarter, 82 percent beat profit estimates, according to Frederick. Average earnings growth of 27 percent so far is higher than than the 25 percent in the second quarter, the strongest full earnings period so far this year.
Economists predict some of the economic growth over the past few months may slow in 2019. The Federal Reserve is expected to raise interest rates again in December, a move that could slow spending and prompt further outrage from Trump, who has criticized the central bank’s actions.
