Summary:
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US indices moving higher on the day
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Markets in the green ahead of Midterm results
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Democrats to take the House being priced in?
There’s been a clear push higher in US indices this afternoon since the opening bell on Wall Street with the US100 leading the way. The markets were trading slightly lower before the US cash session began but there has since been flurry of buying which has pushed prices to their highest levels of the day. The US100 jumped over 1% within 15 minutes of the opening bell and is the biggest gainer, higher by 0.59% on the day at the time of writing.
US markets are in the green and the VOLX falling lower as investors look ahead to the US Midterm results which should be known by tomorrow morning’s European open (7AM GMT). Source: xStation
The gains may be a little surprising to those who would expect some caution heading into the event especially considering the results indicated by polls. FiveThirtyEight is widely regarded as one of the top pollster for these ballots and they are giving a 7 in 8 or 87.8% chance of the Democrats taking the house. This outcome is generally seen as slightly negative for stocks as it would end the Republicans hegemony in Congress and mean that further pro-growth policies are harder to pass. Given this the gains seen in stocks going into the event could be taken to mean one of two things; either that the Democrats taking the house isn’t going to be that negative for stocks (or that it has already been priced in) or alternatively a lack of trust in the polls. Leading pollsters suffered fairly widespread criticism in the wake of Trump’s election win as very few had projected this and while it would be easy to assert that markets are not buying these forecasts, it seems more plausible that they are viewing it as a Democrat victory not being so bad - or already having been discounted.
The Democrats are seen as highly likely to take the House according to leading pollsters. The stock market rally despite this may suggest that this slight negative outcome has already been discounted. Source: fivethirtyeight.com
Looking back at previous Midterms its apparent that regardless of the outcome or whether Republicans or Democrats made gains or losses, it has generally been positive for stocks. During a midterm year the S&P500 (US500 on xStation) has gained more than 10% on average from the October low close until year end, as well as being higher on every occasion since 1950. The October low close on the US500 was 2639 and therefore a 10% gain would come in at 2902.
A 10% gain from the October closing low of 2639 would target a rally to 2902 if the market exhibits the average post-October low gain in a Midterm election year by year-end. Source: xStation
