The Market and Mid-Term Elections
By Stephen Smith
October 6th, 2010
For the first time in many years, one party has more than 100 seats at risk in the House of Representatives. From the research that I’ve been reading, 112 Democratic House seats are at risk with the vast majority of these races competitive. Only 17 Republican held seats are in play, and most political analysts believe that the Republicans are only at risk of losing four of those seats. By comparison, in the 2006 blowout, in which Republicans lost 30 House seats and their House majority, political analysts thought that the Republicans would lose 68 seats on Election Day.
Today, political analysts are currently predicting that the Democrats will lose 39 seats to the Republicans in the House and the Republicans will lose 3 seats to the Democrats for a net change of 36 seats for the Republicans in the House of Representatives, but that doesn’t include the 20 races that are too close to call, 19 of which are currently held by Democrats. If the too close to call races break down the middle, Republicans could gain 45 seats.
The Republicans need a swing of 39 seats in the House to have a majority. Political analysts are predicting that the Republicans are poised to gain six to ten Senate seats. Senate Republicans need a net gain of ten seats, which if history is any guide, will be difficult. The last time one party made double digit seat gains in the Senate was in 1980 when Republicans defeated nine incumbents and won three more Democratic open seats for a 12 seat pickup.
In election years, the stock market typically hits a roadblock in the first half of the year, as investors worry about the looming election. But the market is always looking three to six months ahead and starts looking past the November election by late summer. On average, the S&P 500 stock index has declined by 1% in the first half of the mid-term election years since 1930 and has risen 5% in the second half of the year. This year, the S&P 500 stock index was down 6.65% through June 30, 2010. For the quarter, the S&P 500 stock index gained almost 11% going positive with over a 4% year to date gain. The S&P 500 stock index is up almost 9% in September, its best September since 1939!
With the potential of the Democrats losing several seats in the House and Senate, the market is anticipating that some or all of the Bush tax cuts will be extended or made permanent. The tax issue is especially important this year because it affects not only income taxes but also the capital-gains tax and the dividend tax, all of which are scheduled to rise next year. Taxes on dividends are particularly significant because a return to previous levels would mean more than doubling them from their current 15% levels.
