After-Election Expectations

As October draws to a close, investors find themselves in a familiar position: plenty of headlines, considerable uncertainty, and relatively little progress in most major markets. Since the end of May, U.S. equities have largely traded sideways. The S&P 500 briefly reached a new all-time high in early October, but that milestone masked considerable weakness beneath the surface. Many individual stocks have struggled, small-cap companies have lagged, and international equities have experienced renewed pressure after stronger performance earlier in the year.

In fact, between the S&P 500’s August and October record highs, the equal-weighted S&P 500 declined nearly 5%, illustrating how a relatively small number of large companies can support an index even as much of the broader market struggles.

Meanwhile, rising bond yields, elevated energy prices, and persistent inflation concerns have added to the uncertainty.

And now, with the November midterm elections approaching, investors have another reason to speculate about what comes next.

The stakes are significant.

If Republicans retain control of both the House and Senate, President Donald Trump would have a clearer path to advancing his economic agenda. That could include additional tax legislation, spending priorities, and policies favoring deregulation and domestic energy production. Markets might initially welcome the continuity, particularly in industries that benefit from those policies. However, concerns surrounding federal deficits, tariffs, and inflation could continue weighing on investor sentiment.

If Democrats gain control of the House while Republicans retain the Senate, legislative gridlock becomes more likely. Major new legislation could face greater obstacles, and congressional oversight of the administration would likely intensify. Some investors might welcome the reduced likelihood of significant policy changes, while others could become concerned about budget negotiations and potential government shutdowns.

A Democratic victory in both chambers would create even greater obstacles for the administration’s legislative agenda. However, existing tax policies and many regulatory decisions would not automatically disappear. Investors would still need to evaluate which policies could realistically change and which would remain in place.

The interesting thing is that none of these outcomes guarantees a particular direction for stocks or bonds. History offers an important reminder. According to research from U.S. Bank, stocks have historically produced an average return of approximately 12.4% during the 12 months following midterm elections. But averages are not guarantees, and the economy, corporate earnings, interest rates, and investor expectations often matter more than which party controls Congress.

For firms like ours, which follow a systematic investing process, this uncertainty illustrates what we believe is one of the greatest advantages of our investment philosophy: we don’t have to predict who wins the election — or how markets will react to the results. Our investing process is designed to evaluate what markets are actually doing rather than what we believe they should do. If election results spark renewed optimism and sustained advances in equities, our strategies are designed to participate in favorable trends. If uncertainty leads to additional weakness, our systematic risk management process is designed to recognize deteriorating trends and adjust exposure accordingly.

Of course, that doesn’t mean avoiding every decline. Trend following is inherently reactive, meaning some weakness must occur before a meaningful trend change can be confirmed. But that discipline helps prevent emotional decisions driven by headlines, political preferences, or short-term market volatility.

Ultimately, a client’s financial goals don’t change depending on which political party wins an election. Neither should the discipline of the investment process designed to help them achieve them.

On Nov. 3, voters will decide who controls Congress. In the weeks and months that follow, markets will decide what those results are worth. We don’t need to predict either outcome. We simply need to follow the trends that emerge.