A Mid-Term Victory For Democrats Could Mean Bad News For The Stock Market, Based On Historic Precedent

House Speaker Paul Ryan.
Tasos Katopodis / Getty Images

It has been reported that the most likely result of the 2018 mid-term elections will see the Democrats taking control of the House while the Republicans hold the Senate, an outcome President Donald Trump would like to avoid. According to Decision Desk HQ writer Scott Tranter, Republicans have a 93.1 percent chance of keeping the Senate while Democrats have a 94.5 percent chance of winning the House, a political scenario that has only happened twice in the history of American mid-term elections.

As reported by Business Insider, both times that the outcome of a mid-term election saw the GOP losing the House while holding the presidency and the Senate — in 1910 and then again in 1930 — it meant bad news for the stock market. The market sold off in the year after both of those elections, an selling event that has only happened four times following the last 27 mid-terms.

“The only examples of a Republican President who controlled both the House and the Senate before the midterm elections, but lost control of the House, while maintaining control of the Senate, include only William Taft and Herbert Hoover,” said Nautilus Investment Research in a letter that was sent out to clients on Monday.

“Hopefully comparisons to 1930 end there, as Herbert Hoover is forever associated with the Great Depression and a horrific Bear Market,” they added.

While the stock market decline following Taft’s 1910 mid-term election was a softer blow to take, at 5.5 percent, Hoover was in power when the market suffered an astounding 40 percent wipe-out in the year after the 1930 elections. However, economists and Wall Street analysts claim that if the House flips this year, it could actually mean good news for stocks — as a change in Congress could help manage the damages that have already happened due to the trade war that the Trump administration is currently engulfed in.

A monitor displays the New York Stock Exchange numbers
The current trade war has had an impact on the U.S. stock market. Drew Angerer / Getty Images

“The stock market tends to like gridlock better because it takes away the extremes and does not disrupt the status quo,” stated John Lynch, the chief investment strategist at LPL Financial.

A team of Deutsche Bank strategists agreed, claiming that a scenario in which Democrats take over the house could be helpful as it would impact and potentially reduce the risks “from trade policy friction,” which would also lead to a bigger focus on U.S. market growth. Usually, the Dow tends to perform well in the year following a mid-term election, with an average gain of +12.91 percent, according to Business Insider. A growth of that scale over the next year would mean the Dow would be trading at more than 28,500 by this time in 2019 — beating the record high of 26,951 that was set in early October.