2022 US Midterm Elections Preview

EXECUTIVE SUMMARY

• In a year full of market volatility, the upcoming week holds the prospect of yet another case of whiplash as the 2022 US midterm elections on Tuesday are followed in short order by the October CPI print. The outcomes of these two events could prove pivotal in retrenching risk off sentiment or spurring a rally that helps extend October gains.
• The most likely outcome of the November 2022 midterms is for the Republicans to take a majority in both the House and Senate. Betting markets indicate the odds of this outcome have surged in recent months and prognosticators are also leaning toward a Republican “sweep.” If Republicans take both chambers of Congress, we think there is little impact on near-term fiscal policy as very elevated inflation caps the appetite for additional spending while a divided government helmed by a Democratic president limits the prospect of sweeping policy change.
• The election outcome may prove more powerful from a signaling perspective, especially when we consider the timing of the October CPI print, which is slated for release two days after the midterms. In the case of a Republican sweep, a downside surprise to the October CPI print could boost market sentiment heading into year-end.
• Historically, credit (and equity) markets have generally fared well in the months and year following elections. Since the 1998 election cycle, we find that IG spreads have widened in only 25% of the 12-month periods following elections and total return gains average 7.9%. Performance for HY has proven more mixed with spreads widening in 50% of the 12-month periods following elections, but total return gains average a strong 11.7%.
• The last time Republicans overturned a united Democratic Congress and White House was in 2010. At that time, credit spreads were recovering from the GFC wides and the tightening trend continued post election after a brief bout of spread widening. Credit market performance was tempered by rising UST yields in this period, driving total return headwinds despite spread compression.

(ANOTHER) MAJOR WEEK FOR MARKETS

In a year full of market volatility, the upcoming week holds the prospect of yet another case of whiplash as the 2022 US midterm elections on Tuesday are followed in short order by the October CPI print. The outcomes of these two events could prove pivotal in retrenching risk off sentiment or spurring a rally that helps markets find better footing. For corporate credit, we would expect that spreads would fare the best in a Republican Sweep/Divided Congress election outcome that is followed by a downside surprise in the core MoM CPI read.

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