The midterm U.S. elections will take place on Tuesday. There are three possible ways the elections could unfold:
- The Democrats regain control of the House while the Senate remains under Republican control.
- The GOP fends off the so-called Blue Wave to retain a majority in both chambers.
- The Democrats get a majority in both the House and Senate.
According to various polls, Democrats are expected to take the majority in the House. But if Republicans manage to keep majorities in both chambers, that could boost stocks in the short term on expectations of more tax cuts ahead. A Democratic majority in both the House and Senate, on the other hand, could weigh on the market as it could mean more investigations into Trump. A divided Congress could help diffuse the current trade disputes with other countries.
"For markets, the key issues are whether to expect further fiscal stimulus, and what the implications are for trade policy," said Torsten Slok, chief international economist at Deutsche Bank Securities, in a note Wednesday. "On the former, unified Republican control is likely more bullish, while on the latter, divided government could de-escalate the current trade conflict."
Historically, stocks do well following such contests. Since 1934, the S&P 500 has averaged a gain of 2.7 percent between the five days prior to the election and three days after, according to data from The Stock Trader's Almanac.