Election risk could soon take center stage for the stock market – and investors should reduce risk as equities historically underperform going into mid-terms, Barclays says

  • Stock market investors will soon shift their attention on the US mid-term elections, Barclays says. 
  • “The tide seems to have turned in favour of the Democrats to hold their Senate majority,” the bank said. 
  • Barclays said regardless of the election outcome, stocks look poised to rally at year’s end. 

Stock market investors winding down summer vacations in August are still thinking about high inflation and the Federal Reserve’s response through swift and large rate hikes but it’s not too early to start thinking of reducing risk before US elections are held in November, says Barclays. 

“Beware of rising political uncertainty in the US [as] political developments into the US mid-terms could take centre stage,” analysts led by Emmanuel Cau, head of European equity strategy at Barclays, said in a note published Friday. 

Markets are still primarily focused on how big the Fed’s rate increase in September will be as it continues to combat hot inflation. Investors will see if Fed Chairman Jerome Powell at his Jackson Hole speech next Friday will echo other Fed officials in being open to another quarter-point increase

But Barclays flagged a change in voting sentiment on PredictIt, a platform used for betting on election outcomes.

“The tide seems to have turned in favour of the Democrats to hold their Senate majority,” the note said. In the Senate, 35 of the chamber’s 100 seats will be contested. 

“The wide margin Republicans have enjoyed all through the year began narrowing since June end, which may be due to falling gasoline prices and a still resilient labour market boosting support for the Democrats,” the investment bank said.  

US President Joe Biden’s top labor official touted the July jobs report, saying it points to the US economy’s ability to avoid a recession. 528,000 jobs were added to the economy last month, more than double the expectations held by economists. Meanwhile, average gas prices around the country have dropped below $4 a gallon for the first time since March, according to motor club AAA.

Biden also scored a tension-filled legislative win in the passage of the Inflation Reduction Act. The bill he signed into law this week, among other things, apportions $370 billion for climate and energy programs

Barclays said its market analysis of past mid-term election years over the past 100 years shows equities tend to perform worse than average into the vote. However, regardless of the outcome, the performance of stocks improves after the electoral contests are over. 

“[If] history repeats itself, investors should reduce risk into the November elections and position for a year-end rally afterwards,” said Barclays. The S&P 500 has lost roughly 11% in 2022, paring a deeper loss that had thrown the index into a bear market. 

Mid-term elections will be held on November 8. Along with Senate races, all 435 seats in the House of Representatives are up for a vote. 

Before that, the Federal Open Market Committee will meet on September 20-21. Policy makers may settle on a rate hike of 50 basis points or they may decide on a third consecutive and hefty increase of 75 basis points that would take the fed funds rate to a range of 3% to 3.25%. Inflation was running at 8.5% in July.