On election night, the focus will largely be on Vice President Kamala Harris and former President Donald Trump, though investors will be keeping an eye on various congressional races as well. While the presidential election garners significant attention, the outcomes of congressional races are crucial for investors, as the president needs Congress to pass legislation, and Congress can override presidential vetoes. Moreover, the composition of Congress has historically correlated with market returns.
In terms of the House of Representatives and the Senate, predictions are uncertain, and either party could potentially win control. However, some sources as of October 28 have suggested that Republicans are more likely to secure the Senate, with FiveThirtyEight’s simulations indicating an 88% probability of this outcome. The race for the House is more competitive, with Republicans having a 52% chance of taking control, making it a point of interest for investors.
According to the nonpartisan Cook Political Report, 25 House races are considered toss-ups, with both parties holding potential for victory. Among these races, notable Republican incumbents include David Schweikert (AZ-01), Juan Ciscomani (AZ-06), John Duarte (CA-13), David Valadao (CA-22), Mike Garcia (CA-27), Ken Calvert (CA-41), Michelle Steel (CA-45), Mariannette Miller-Meeks (IA-01), Zach Nunn (IA-03), Don Bacon (NE-02), Anthony D’Esposito (NY-04), Marcus Molinaro (NY-19), Lori Chavez-DeRemer (OR-05), and Scott Perry (PA-10).
New York emerges as a key battleground state, offering both parties a chance to claim victory, with Democrats aiming to flip two Republican-held seats. Additional states with significant toss-up races include California, Arizona, Iowa, Pennsylvania, and Michigan.
Market investors will be closely monitoring election outcomes, voting based on diverse concerns, with the economy being a primary focus for many individuals. Historical data indicates that the stock market typically performs better when Congress is split, with average annual returns of 17% for the S&P 500 under these conditions, surpassing typical returns.
If the Senate is expected to be controlled by Republicans, attention will be directed to whether Democrats can secure control of the House. Despite challenges in accepting political gridlock, which often hinders the passage of new laws, some investors might prefer this situation as it decreases the likelihood of sweeping legislative changes that could affect specific sectors. Additionally, the current corporate tax rate of 21% is viewed favorably by investors who would prefer it remains unchanged.
Investor preferences, however, will vary depending on individual strategy, but overall, the S&P 500 has shown to benefit from a gridlocked Congress.
