Election outcomes and how to invest

Policy and investment implications of the 2022 US midterm elections

Scenario analysis

We see three realistic possibilities in terms of election outcomes. The most probable scenario at this time is a divided Congress, with Democrats retaining narrow control of the Senate and the GOP assuming control of the House. The second most likely scenario is a unified Congress under Republican leadership. The third, which is less plausible but whose odds have increased over the past few weeks, is the retention of Democratic control of both houses. A fourth scenario—Democrats retaining control of the House but losing the Senate—is theoretically possible but highly unlikely.

How to invest

Over longer time periods, there is no consistent relationship between control of the executive and legislative branches of government and market returns.1 Overall, stocks typically trade sideways prior to the election and then rise in subsequent months.

We believe monetary policy decisions from the Federal Reserve will be the key market driver this year, especially given our base case for limited fiscal spending in a gridlock scenario. As a result, we believe the market impact of the midterms will be muted and advise investors to avoid taking big directional bets in anticipation of the election results.

That being said, we do believe that investment themes stand to benefit from the policy envi­ronment both heading into, and beyond, Election Day. For specific company ideas tied to these themes, please reach out to your UBS advisor.

Election outlook

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    Probability of a Republican sweep*

Republicans assume control of both the Senate and the House

The probability of a Republican sweep declined following the Supreme Court’s Dobbs decision that relates to abortion access but has slightly rebounded in recent weeks. Some GOP Senate candidates in swing states are still vulnerable, but others are now better positioned to defend narrow leads. Turnout among registered Democrats and unaffiliated voters is likely to be key to this midterm election and control of the Senate.

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    Probability of a divided Congress*

Democrats retain control of the Senate but lose the House

President Biden’s job approval ratings have improved in recent weeks but remain in negative territory. This will have a pronounced impact on House races, where the GOP is expected to pick up seats and recapture the majority, albeit by a narrower margin than anticipated earlier this year. Senate election outcomes tend to be less correlated to presidential popularity than House races, but control of the Senate will be closely contested. If Democrats do retain their majority, they are likely to do so by a very narrow margin.

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    Probability of the status quo*

Democrats retain narrow control of both chambers of Congress

The probability of Democrats holding both chambers is low and has declined marginally in recent weeks. Midterm elections are notoriously challenging for the party holding the White House, and this year should prove to be no exception. The president’s party usually loses at least two dozen seats in midterm elections. Current polls suggest the GOP may win fewer seats than usual but still enough to control the House.

Fiscal policy implications

Sector outlook

Further reading