Original Article from Goldman Sachs Asset Management


When History May Not Repeat

 With US midterm elections nearing, investors are increasingly looking to polls, public sentiment, and history for insight into what November may bring. Midterms have usually favored the opposition party to the President, especially in the House of Representatives. In fact, the opposition party has picked up an average of 26 House seats since World War II. While the odds for Republicans to flip the House remain favorable, margins may stay slim given the fewer number of competitive seats today. In our view, politics may impact future policies, but its predictive signals for market performance remain limited.


Competitive Shifts

The likelihood that Republicans flip the House in November remains fairly high, albeit with wide tails. However, we believe today’s gains might not be as great in magnitude as past elections, making it difficult for history to repeat. Widespread partisan re districting and broader political polarization have shifted the battleground from general elections to primaries. Consequently, we see fewer competitive seats1 today, limiting the potential for seismic party shifts.

Source: The Cook Political Report and Goldman Sachs Asset Management

Tight Flips

Still, the hurdle to flipping the House is much lower today. Republicans will only need to pick up five seats to flip control of the House, a threshold that has only been equal to or lower two other times in modern history. Meanwhile, in the Senate, candidate quality is paramount with fewer races overall. Ultimately, current polling suggests a strong likelihood of a divided government going forward.

Source: The American Presidency Project (UC Santa Barbara), Predictit, and Goldman Sachs Asset Management.

Mixed Markets

In our view, election outcomes may have implications for broader policies. But, for markets, the statistical strength of the relationship between elections and markets has historically been weak. We expect macro risks and fundamentals to be dominant drivers of market returns. As such, political enthusiasm may be best expressed through a vote, not a trade.

Source: Bloomberg and Goldman Sachs Asset Management.


Top Section Notes: As of September 30, 2022.

1A competitive seat is measured by the Congressional districts voting for a presidential nominee of one party and member of the House in another party. Middle Section Notes: As of September 30, 2022. Chart shows the number of sea ts in the House of Representatives that were held by the President’s party on US midterm election day. “Threshold to Flip House Majority” reflec ts the minimum number of party seats required to retain the majority in the House. Bottom Section Notes: As of September 30, 2022. Chart shows the S&P 50 0 price returns leading up to and following US elections in years where the House control flipped from one party to another. Data begins in 1 930 . The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Past performance does not guarantee future results, which may vary.