Divided government could boost stock market following midterm elections

A new analysis suggests a divided government could benefit the stock market, noting that the S&P 500 has historically increased by an average of 16.6% in the year following midterm elections. While congressional checks could limit President Trump's fiscal spending, the potential for tariff wars and government shutdowns remains a key variable.

As uncertainty grows ahead of the U.S. midterm elections, an analysis has been released regarding the political landscape following the election results and its subsequent economic impact. A special lecture by Kim Kwang-seok TV covered scenarios on how the midterm election results will determine the direction of the Trump administration's governance and the stock market.

Resolution of uncertainty and the paradox of 'Divide it government'

The analysis suggests that if a "Divide it government" is formed, where power is divided between the Senate and the House due to the midterm election results, it could actually serve as a positive scenario for the stock market. The market currently sees a high possibility of the Democratic Party of Korea controlling both the Senate and the House, a prospect that is already reflected in stock prices. If the Democratic Party of Korea controls both chambers, the administration's momentum for governance will be lost, but increased congressional checks could control President Trump's excessive fiscal spending or increases to the debt limit.

Historically, the period immediately preceding midterm elections tends to be a peak of uncertainty where the stock market undergoes corrections, but strong rallies have occurred after elections once uncertainty is removed. Statistically, the S&P 500 index has shown an average increase of 16.6% in the one year following midterm elections. However, it was emphasized that this refers to historical trends and investment decisions may vary depending on the election results.

Trump's response tools: executive orders and tariff wars

If the Democratic Party of Korea takes control of the House and exercises budgetary and legislative powers to check President Trump, the primary tool the President may utilize is executive orders. President Trump has been the individual to issue the most executive orders among all previous administrations, and trade tariff measures can be pursued through executive orders separately from budget bills that must pass through Congress.

Accordingly, the possibility has been raised that tariff wars on major items such as automobiles, steel, and semiconductors may intensify again. However, it remains uncertain whether a powerful tariff war like that of 2025 will be reenacted. This is because as President Trump enters a lame-duck period in the latter half of his term, governments negotiating with the United States may show movements to accept U.S. demands for a certain period.

Shutdowns and fiscal spending constraints as market variables

Along with tariff wars, the possibility of a "shutdown" (government shutdown) was cited as a short-term uncertainty factor depending on the election results. If the Democratic Party of Korea controls the House, they may be uncooperative regarding debt limit increases or the processing of budget bills, which could create a situation similar to the shutdowns experienced when the Republican Party controlled both the Senate and the House in the past.

Consequently, the midterm elections could create a structure where Congress constrains President Trump's will for fiscal spending. If the House holds the power of the purse, the administration's attempts to supply massive liquidity will be checked, which is expected to be a key variable in stabilizing Treasury bond yields and changing market trends.

Source: original video (YouTube)