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“The fact that so many successful politicians are such shameless liars is not only a reflection on them, it is also a reflection on us.” – Thomas Sowell

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Election Day is here, and hopefully, that means when we all come in tomorrow morning, the midterms will be behind us and markets can shift their focus to Thursday’s CPI.  Futures are higher this morning in a modest drift higher, and the market attempts to digest the impact of higher rates.  Earnings reports are still coming in hot and heavy, but the majority of the S&P 500’s largest companies have already reported, so until the retailers start reporting next week, there aren’t likely to be any major tape bombs.

28 years ago today marked the beginning of the “Republican Revolution” where Newt Gingrich led the Republican Party to gain control of both the House and Senate for the first time in more than 40 years. The 1994 midterms saw the Republican party gain 54 seats in the House and 9 seats in the Senate. The performance of Republicans in 1994 was the best in a midterm election for the party since 1946 when they picked up 12 seats in the Senate and 55 seats in the House.  Since 1994, the only other midterm year where either the Democrats or Republicans picked up more seats in the Senate was in 2014 (R+9), and the only midterm where there was a larger increase for either party was in 2010 (R+63).

We won’t know until after all the votes are counted, but betting markets and many national polls suggest that like 1994, the Republican Party will win control of both the Senate and House.  Given the already closely divided nature of both chambers of Congress, though, the number of seats expected to be picked up in this cycle is expected to be much smaller (3 in the Senate and around 30 in the House).  Barring an extreme outcome (in either direction), though, there is unlikely to be much in the way of changes legislatively, so get ready for two years of gridlock.

As big as the Federal government has become over the decades, the impact of party control on financial markets tends to get overstated.  While it most definitely has impacts on certain industries, the direction of the economy and financial markets won’t be dictated by the actions of a few hundred people in DC.  Or at least that’s what we like to think, even though sometimes it seems as though that’s all the market is focused on.

Taking a stroll down memory lane, the chart below shows the performance of the S&P 500 in the year leading up to and after the 1994 midterm elections.  It’s obviously only a sample size of one, so we would put little weight on it, but in an environment where good news is hard to come by, bulls will take whatever they can get.  In the year leading up to the 1994 election, the S&P 500 essentially traded sideways as the markets and economy were pressured by a hawkish Fed and what would be the Orange County bankruptcy, but the year after that midterm election saw the S&P 500 surge 27.1%.

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