Midterms and the Markets

December 6, 2022

By Tim Courtney, Chief Investment Officer


Markets on average have had good performance in the quarters following mid-term elections.1  Unfortunately we can’t rely on such patterns.  Broad rules such as the “Santa Claus Rally” (see 2018) or “Sell in May and Go Away” (see 2020 and 2021) don’t always pan out.

This year’s midterm elections resulted in a split Congress, with Republicans taking control of the House of Representatives and the Democrats retaining control in the Senate.2 With this division of power comes the potential for gridlock.


The Benefits of Gridlock

In many cases, investors prefer gridlock because it limits potential variables that need to be taken into account in determining prices.  Market uncertainty and volatility often stem from big policy and regulatory changes like the kind we saw recently in the UK, but with a split Congress it’s less likely significant legislation will pass both chambers.

If we look at the two most recent presidential administrations, each administration has had a signature legislation package. The Biden Administration’s Build Back Better Bill3 which eventually became the Inflation Reduction Act was passed in August of this year and affects energy and climate spending, health care, and tax reform.  The Trump Administration’s Tax Cuts and Jobs Act of 2017 cut the corporate tax rate from 35% to 21% among other tax modifications.⁴ Both of these acts had ripple effects across markets.  Both of these acts were passed before Congress became divided.

Now that we are past the midterms and new legislation becomes a smaller variable, markets can spend the next several quarters focusing on fundamental variables, such as earnings growth, interest rates, GDP, and productivity.


Not all Rules Come from Congress

With a smaller chance of meaningful legislation being passed, this brings up another issue markets do have to consider. Many, if not most, of the rules that companies and markets operate under are developed by agencies.  In many ways markets are more affected by agency decisions than what Congress does. As agencies grow there is growing risk of overregulation.  Conversely, there is a risk of agency “capture” in which regulations tend to favor the largest and most connected firms and industries.  In some areas such as the cryptocurrency markets and the collapse of FTX, there has been little or no oversight.5

A healthy market should be rooting for agency reform to ensure that companies, especially smaller companies, are not overburdened with regulations.  At the same time a healthy market should be rooting to eliminate captured regulators that favor certain companies or industries over others.  If you have any questions, please reach out to your Exencial Advisor.




  1. Forbes (11/07/22) – 3 Ways the Midterm Elections Could Impact the Stock Market
  2. The Washington Post (11/17/22) — Senate, House control is split. Can a divided government make progress?
  3. The Guardian (10/18/21) — What’s actually in Biden’s Build Back Better bill?
  4. Tax Policy Center (11/18/22) — How did the Tax Cuts and Jobs Act change business taxes?
  5. The Washington Post (11/17/22) — Congress took millions from FTX. Now lawmakers face a crypto reckoning.

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