How might midterm elections move markets?

PodcastInsights NowMeera PanditSep 17

The guest and other speakers discuss the electoral factors that could shape control of Congress, including presidential approval, inflation, fundraising, and redistricting. They also consider how divided government could affect fiscal negotiations, shutdown and debt-ceiling risks, and the scope for deficit expansion. On markets, speakers caution that historical midterm volatility can reflect other forces, while policy, interest rates, and AI have also shaped returns.

Geopolitical Risk Fiscal Policy Government Debt Market Volatility Inflation Interest Rates

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Key Takeaways

The guest says Democrats would need to flip about four Senate seats or three House seats to take control, while the speaker estimates redistricting could give Republicans five to 10 seats and Democrats 10 to 20 in the broader midterm swing. The speaker guesses the Senate will stay Republican-controlled while the House could turn Democratic, bringing divided government and more gridlock.

The guest says the president’s near-term-low approval rating could be a midterm headwind, especially as lower turnout may favor disgruntled voters; inflation, affordability pressures, and rising gasoline prices could also favor Democrats despite a decent economy and no recession on the horizon. The guest adds that Republicans’ fundraising advantage can raise awareness in targeted races.

The speaker says tariffs are currently estimated at 10.6%, below the prior 15.4% level and earlier potential 30% maximum, and that the peak of uncertainty has passed in the base case even as trade is being rewired. Companies are responding by moving supply chains closer to consumers, diversifying away from China, and reshoring some operations for national security.

GEO-POLITICS

Chamber Control — The guest says Democrats would need to flip about four of the 35 Senate seats up for election to control the Senate. Three House seats would be enough to take control of the House.

“So if we think about the senate first, 100 seats in the senate, about 35 are up for election this time around…”—

Approval Headwind — The guest says the president’s approval rating is near its lowest point of the term and relatively low compared with the prior term and other presidents. She says midterms tend to draw lower overall turnout, with disgruntled voters more likely to show up, creating a potential electoral challenge.

“So if you think about the midterms as a referendum on the president and you think about the president's approval rating right now, it's basically at the lowest it's been…”—

Midterm Factors — The guest says a decent economy and no recession on the horizon could be offset politically by inflation, affordability pressures, and rising gasoline prices, which might favor Democrats. She also says Republicans’ national fundraising advantage can raise awareness in targeted races and make a difference.

“Right now, the economy is in a pretty decent place…”—

TECHNOLOGY

AI Sentiment — The speaker says American sentiment toward AI shifted from 38% of Americans being more concerned than excited in 2022 to roughly an even split today. She links these anxieties to data-center construction and possible job displacement.

“The backlash has arrived. Yep. If you looked back when Chat launched in 2022, you had about 38% of Americans more concerned than excited about AI…”—

ECONOMY

Reconciliation Agenda — The speaker says the One Big Beautiful Bill Act extended tax cuts and included spending cuts, followed by a narrower reconciliation package for immigration and border funding. A proposed third package covering housing, health care, and defense may be harder to assemble because Republicans have less workable consensus and much of the low-hanging fruit has been used.

“So last summer, you saw the one big beautiful bill act, which was essentially reconciliation one point o where they had that one chance every year during a fiscal year…”—

MARKETS

Midterm Volatility — One speaker says historical midterm years have had lower returns and higher volatility, but cautions that recent examples were driven by other factors. These included Fed hikes in 2018 and 2022, with an exceptionally fast hiking cycle in 2022.

“Because, yes, it is a fact…”—

Election Rally Timing — One speaker says markets often begin to pick up before voters go to the polls, making election-day market timing difficult. The speaker frames the pre-election pickup as investors checking off election-related uncertainty.

“The challenge with that is then you see a nice takeoff in the fourth quarter, but it's not election day, polls close, markets start to turn around…”—

Congressional Control Stakes

Pandit describes the narrow paths to control of the Senate and House, weighing presidential approval, turnout, inflation, fundraising, and redistricting.

Divided Government And Fiscal Policy

The speakers expect limited policy change after the election but identify budget negotiations, reconciliation, shutdowns, debt-ceiling risks, and constrained deficit expansion as investor concerns.

Affordability And Trade Policy

They discuss affordability, deregulation, tariffs, and executive authority, noting that tariff levels have fallen from their peak while trade realignment remains a lasting issue for companies.

AI Backlash And Regulation

Pandit says public concern about data centers, energy costs, and job losses is growing, while federal action remains limited and state and local rules are emerging.

Midterm Volatility And Markets

The speakers caution that historically weaker midterm-year returns and higher volatility often reflect other drivers, including Federal Reserve rate hikes and unrelated market shocks.

Policy, Rates, And Returns

Pandit argues that policy effects take time and that interest rates and AI have been more important market-return drivers than party control or election cycles.

Election Research Resources

Pandit recommends the Cook Political Report, Sabato’s Crystal Ball, and NPR politics coverage for tracking races, redistricting, and election developments.