What will the midterms do to stocks?

The upcoming midterms have investors questioning their potential impact on stock markets. Michael Hartnett, a renowned asset strategist at BofA, has highlighted his focus on geopolitical matters. For example, the 1980 election led to a shift from inflation to a bond bull market, while the 2016 Brexit and Trump election ended globalization and initiated a commodities bull run. However, it seems that the midterms may not significantly alter the path of US government spending.

The 2020s are projected to be a decade of political populism, with both MAGA (Reform party in the UK) and Democratic Socialists of America (Greens in the UK) representing the culmination of post-GFC Tea Party and Occupy Wall St insurgents. These populists tend to prioritize spending to maintain popularity.

Fiscal excess is expected to continue during this decade, resulting in a nominal GDP boom. Over the past six years, the US GDP increased by 63%, from $20tn to $32tn. Investors are not particularly fearful about the midterms, as they believe the President governs through Executive Orders rather than Congress. Since Truman, there have been 277 Executive Orders, putting the current count on track to become the most since the Truman administration.

Additionally, a Democratic sweep in the midterms appears unlikely, given the challenging Senate map. In an August BofA Fund Manager Survey, 47% of respondents predicted a GOP Senate and Democratic House, 23% anticipated a Democratic sweep, and 9% foresaw a GOP sweep with the maintenance of control over Congress. Currently, the GOP holds a 53-47 Senate majority, while the House holds a 218-212 lead.