In the history of the Nasdaq, there are only two instances where the president’s party lost control of both chambers of Congress during a midterm election: 1994 (under Clinton) and 2006 (under Bush).
In both cases, the market struggled in the immediate aftermath—over the first one to three months—but showed significant gains by the six- and 12-month marks.
However, before concluding that "the stock market will definitely rise if Trump loses," one must examine the specific conditions that prevailed during those periods.
In 1994, the primary concern for the markets was the Federal Reserve and rising bond yields. The Fed began raising interest rates in February, increasing the policy rate from 3% to 5.5% over the course of the year—including an additional 75-basis-point hike just one week after the election. By November, the yield on the 10-year U.S. Treasury note had reached approximately 8%.
Furthermore, while there was military tension involving Iraq, there was no large-scale conflict—akin to the current situation with Iran—that would disrupt energy transport. Oil was not a core issue at the time. The following year, after a final rate hike in February, the Fed began cutting rates in July; the 46.95% rally in the Nasdaq-100 ($NDX) reflects this shift in policy.
In 2006, during the Bush administration, the U.S. was engaged in wars in Iraq and Afghanistan. The war in Iraq and public sentiment toward the administration were the central issues of the election—a parallel that makes this period more comparable to the present day.
Yet, there is one critical difference: as the election approached, oil prices were falling. The monthly average price for WTI crude dropped from $74.41 in July to $58.89 in October. In the rate-hike cycle that began in 2004, the Fed had raised interest rates to 5.25% before pausing these increases in August.
In other words, even though the war was ongoing, there was some relief regarding the pressures from energy costs and interest rates.
Today, however, the conflict involving Iran and the risks in the Strait of Hormuz persist. Furthermore, the Fed raised interest rates in September. Consequently, we are currently experiencing a combination of the wartime environment seen in 2006 and the interest-rate pressures characteristic of 1994.
Regardless, I believe the core issues following the election will be: Is the price of oil declining? Is inflationary pressure easing? And is the Fed nearing the end of its rate-hike cycle?
If these conditions are met—and provided that corporate earnings remain resilient—the loss of the House and Congress by the Republicans might not hinder a market rally; in fact, it could even be a positive development.
Having a President and a Congress from different parties could make significant changes to tax and spending policies more difficult to implement. However, the impact on the market would depend on exactly which policies are blocked.
If oil prices remain high, the Fed continues to raise rates, and corporate earnings expectations deteriorate, then I would not place much faith in the two positive historical precedents.
I do not interpret this data as a guarantee of a post-election rally. A loss for the incumbent party could create challenges for the market in the initial one-to-three-month period. Nevertheless, I believe that in six to twelve months' time, we will be in a better position.
