US Stocks Enjoy Highest Post-Midterm Gains Since 1982: 5 Picks

On Nov 7, Wall Street posted its biggest gains after a midterm election since 1982. As was widely expected, Republicans held on to their Senate majority, even extending it by a slim margin. Meanwhile, Democrats gained a majority in the House of Representatives for the first time in a decade.

A large swathe of market watchers thinks that a gridlocked Congress will be beneficial for U.S. equity markets. One section thinks that this will maintain the status quo, leaving the key Trump administration policy initiatives such as tax cuts and deregulation untouched.

Meanwhile, progress could be made on issues such as higher infrastructure spending. And any further policy moves would be fiscally neutral, meeting the approval of markets. This is why it makes sense to bet on stocks that have surged strongly year to date and are poised to consolidate on these gains in the near future.

Dow, S&P 500 Post Best Gains in 36 Years

On Wednesday, the Dow and S&P 500 both gained 2.1%. Even the embattled Nasdaq increased 2.6% with all three benchmarks closing short of intraday highs. This was the Dow and Nasdaq’s largest single-day increase since Oct 16 while the S&P 500 posted its best session since Oct 25.

More importantly, this post-midterm rally exceeded the average gain which follows such results. According to Goldman Sachs (NYSE:GS) , the S&P 500 posts an average gain of 0.7% from a day before such contests till a day after.

These were the largest such gains for the S&P 500 and the Dow since the trading session after the 1982 midterm elections. On that occasion, the blue-chip index and the S&P 500 had increased by 4.3% and 3.9%, respectively.

Gridlocked Congress to Benefit Wall Street?

Traditionally, stocks incur strong gains when a divided Congress is accompanied by a Republican President. According to Bank of America Merrill Lynch (NYSE:BAC), the S&P 500 posts an average annual return of 12% on such occasions. These gains stem from the belief that a gridlocked Congress will help to maintain the status quo.

Since Republicans continued to hold on to their Senate majority, Trump’s tax cuts would survive until the Presidential elections of 2020. At the same time, a divided Congress could prevent the President from announcing further tax cuts which have already created a substantial budget deficit.

Congress could even witness bipartisan progress on higher infrastructure spending. This is one issue Trump has been touting since his election and dovetails neatly into traditional Democratic priorities. Any measure taken on this count would also be largely fiscally neutral.

With the Trump administration focused on increasing defense spending, Pentagon funding would also rise. Democrats have also agreed to raise the defense budget for fiscal year 2019.

Our Choices

Markets have warmly welcomed the announcement of midterm election results. Some market watchers think that this is largely a relief rally, since the results provided no major surprises. However, a gridlocked Congress could serve to maintain the status quo.

This would benefit diverse economic sectors even as spending on defense and infrastructure rises. This is why it makes sense to bet on stocks that have gained year to date and are set to move higher in the near future. However, picking winning stocks may be difficult.

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Written By: Zacks Investment Research