Midterm Elections: Last 3 Elections Have Lessons For 2022

A quick look at asset class performance following the 3 most recent elections:

• In the 2016 elections when Trump beat Clinton against most expectations, the immediate knee-jerk reaction was "sell everything" with equities and Treasuries, and USD sinking. But this looked more of a reactionary move to a badly mispriced outcome (going into election day, Clinton was priced 80-90% to win by bookmakers, similar to the probability attributed to the Democrats losing congressional control this year). Ultimately equities and the USD resumed their longer-term uptrends with Treasuries continuing lower as multiple pro-cyclical macro possibilities emerged, including tax cuts.
• In 2020, while the eventual outcome (Democrat sweep) was mostly priced in (60-65% odds), we had to wait until January 2021 for Senate control to be determined by Georgia runoffs - that might occur again this time. The market reaction wasn’t complete until months after the election, when the expansionary fiscal implications could be priced. Stocks ascended with USD falling and Tsys drifting lower after the November elections; however starting in January, the USD bottomed out and Tsys began to plunge (equities continued to rise).
• But the best recent analogy for the 2022 election setup is the last midterms in 2018: an incumbent president's party faced a loss of Congressional control (the Democrats were seen with an 80-90% chance of winning control of the House with Republicans a similar % of retaining the Senate). That's what played out, and there was little market reaction. However, economic and market headwinds emerged in the year following, which among other things saw the Fed end and reverse its hiking cycle.