How US Midterm Elections Could Impact Crypto and Stock Market

YEREVAN (CoinChapter.com) – US midterm elections occur near the midpoint of a president’s four-year term of office. In 2022, the preset date for the elections is Nov 8. And while the pivoting point is looming, many market participants wonder how will a possible change in Congress majority affect the stock market and cryptocurrencies.

Democrats Expected To Lose

Many market strategists, including JPMorgan’s Meera Pandit, expect Republicans to win Congress majority after the midterm elections. In detail, Democrats currently have a five-seat majority in the House of Representatives, which is a razor-thin advantage. Additionally, historical data doesn’t favor the democrats either.

The president’s party has lost House seats in 17 of 19 midterm elections since World War II and Senate seats in 13 of 19, with an average seat loss of 27 seats in the House and three to four seats in the Senate. Additionally, midterms are often a referendum on the current administration.

said Pandit.

Additionally, President Biden’s approval ratings are low, according to Nov 2 data from Reuters.

The Ruling Party Doesn’t Affect The Markets?

Therefore, a divided government seems to be the most likely outcome.

Meanwhile, historical data also suggests that markets provide a volatile and choppy performance during times of uncertainty. Since 1942, median equity market returns in Q1-Q3 of midterm election years were -1%, 2%, and 5%, respectively, but fourth-quarter returns jumped to 8%.

Thus, once the hype after the mid-term elections settles and markets stabilize, equities tend to recover regardless of which party claimed the Congress majority. It seems like inviting political preferences into investment decisions doesn’t do the market participants any favors.

However, will there be a change in policy regarding interest rate hikes if Republicans prevail?

Will The Republicans Cut Back On Interest Rate Hikes?

Morgan Stanley’s top-ranked strategist Michael Wilson believes the midterm elections could fuel a rally on the equities market. In a note on Nov 7, Wilson wrote the possible win for Republicans provides a “potential catalyst for lower bond yields” and higher equity prices.

He also asserted that a “clean sweep” by the Republicans could slam the breaks of fiscal spending and reduce the historically high budget deficits. That, in turn, could fuel a rally in 10-year Treasuries and push the stock market higher.

As CoinChapter reported earlier, the Fed’s four-round 75 bps interest rate hikes, designed to curb the rising inflation, resulted in an over 20% slump in the S&P 500 index (SPX). According to a recent Financial Times report, large hedge funds, such as Brevan Howard, ran wagers on the dollar instead of stocks.

However, the dollar bets could go sour if Fed Chair Jerome Powell suggests a decrease toward a 50 basis-point interest rate hike in December. So, according to Wilson, if Republicans win the congressional majority, a cutback on hawkish policies is in the books.

What About Cryptocurrencies?

Due to Bitcoin’s high correlation with risk-on assets, it tends to suffer in times of economic distress. As mentioned, the investors’ determination to bet on the dollar sent the stock market into a downward spiral, and digital assets followed suit.

However, should Republicans skew the hawkish policy and cut back on interest rate hikes, Bitcoin could take off in tandem with the stocks, pulling the rest of the crypto market up. As of Nov 7, the flagship crypto stood at approximately $20,700, holding the $20,000 support since Oct 26.

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