This morning we awoke to discover that the neither the House nor the Senate have been decided. Republicans probably regained control of the House of Representative from the Democrats. It looks like the Senate will remain under Democratic control, but that is not assured. Depending on votes that have yet to be counted, the projected results still could change. What does this uncertainty mean for markets? It’s good, but not for the reason people think. Six and twelve-months returns are historically positive after the first mid-term election regardless of which party wins or if the incumbent party gains or loses Congressional seats. Whether due to seasonal issues, political clarity, or something else, equity returns coming out of midterm elections are usually strong.
Additionally, equity bear markets frequently end in October. Maybe more importantly, we think fixed income will start working again and investors should expect solid returns from fixed income in the intermediate term. There are risks both from inflation and the economy. Inflation is not under control but there are many signs that it will start coming down rapidly. There is no guarantee that it will moderate or that efforts to curtail inflation won’t cause a recession. We think any recession would be mild, but there is a risk that the Federal Reserve overtightens and causes distress in financial markets and the economy. NPP does not think that is the most likely outcome, but it remains a possibility. For now, we think stock and bond investors should look forward to positive prospective returns while monitoring the economy and financial markets for signs of stress.