US midterm election outcome could be marginally positive for markets

In the recent US midterm elections the Republicans gained a majority in the Senate and increased their existing majority in the House of Representatives. With now, a some 30-seat majority, it represents the largest Republican House majority since the Depression. However, while this may appear big trouble for Obama, the composition of the new Republicans will in fact be more centrist (i.e. less ‘Tea Party’).

“In the sixth year of a president’s term, the president’s party typically loses – and often loses big”- By Libby Cantrill and Josh Thimons – PIMCO Viewpoints

Below summary of article written by Chris Walker

In the recent US midterm elections the Republicans gained a majority in the Senate and increased their existing majority in the House of Representatives. With now, a some 30-seat majority, it represents the largest Republican House majority since the Depression. However, while this may appear big trouble for Obama, the composition of the new Republicans will in fact be more centrist (i.e. less ‘Tea Party’).

Given these results, our view is that next year’s Congress will likely be incrementally more productive than that of recent years – though that would not be difficult as we are finishing the least productive session of Congress ever.

From a market perspective, we believe the election outcomes are marginally supportive for both equities and the US dollar, but they also increase, to some degree, the prospect of market volatility.

Historically speaking, the period following a midterm election has been generally favourable for equities and other risk assets. Since 1950, the S&P500 index has returned 15.8% on average in the year following midterm elections, with no instances of negative perform

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