US midterms: a political shift, not a market reset

The US midterm result shifts political power toward the Democrats but is unlikely to reset markets, which should remain driven mainly by macroeconomic fundamentals, earnings, Fed policy and shocks.

• Democrats took control of both the House and Senate, with the vote swing most pronounced among younger and Hispanic voters and economic concerns and the cost of living the defining issues for many voters.
• Democrats appeared likely to flip nine Republican-held Senate seats while retaining all their own, potentially giving them as many as 56 Senate seats.
• A stronger Democratic Senate majority could limit individual senators' ability to disrupt the agenda and reduce the president's ability to nominate candidates who might undermine Federal Reserve independence.
• Congressional gridlock may reassure government bond investors by reducing the likelihood of another major fiscal stimulus package, although Democrats could soften spending cuts, particularly in healthcare, leaving the budget deficit near 6% of GDP.
• The S&P 500 has risen in the year following all 20 midterm elections since World War Two, with an average return of 14.4%, although this pattern may be a statistical quirk.

Takeaway: Investors should treat the election as a political shift rather than a market reset; the president's veto power and executive action remain important, while economic data, company earnings, Fed policy and market shocks are likely to matter more than the result alone.