Reduce risk as the midterm elections approach

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  • Stock market investors will soon turn their attention to the US midterm elections, Barclays says.
  • “The tide appears to have turned in favor of the Democrats to retain their majority in the Senate,” the bank said.
  • Barclays said regardless of the election outcome, stocks look set to rally at the end of the year.

Stock investors ending their summer vacation in August are still thinking about high inflation and the Federal Reserve’s response with rapid and large rate hikes, but it’s not too early to start thinking about cutting risks ahead of the U.S. election in November, Barclays said.

“Beware of growing political uncertainty in the United States [as] medium-term political developments in the United States could take center stage,” analysts led by Emmanuel Cau, head of European equity strategy at Barclays, said in a note released on Friday.

Markets are still primarily focused on the size of the Fed’s rate hike in September as it continues to battle runaway inflation. Investors will see if Fed Chairman Jerome Powell, during his speech in Jackson Hole next Friday, will echo other Fed officials in being open to another quarter-point hike.

But Barclays reported a change in voting sentiment on PredictIt, a platform used to bet on election results.

“The tide appears to have turned in favor of the Democrats to retain their majority in the Senate,” the memo said. In the Senate, 35 of the 100 seats in the chamber will be in contention.

“The wide margin that Republicans have enjoyed throughout the year has begun to shrink since late June, which may be due to falling gasoline prices and a still-resilient labor market that is bolstering support for Democrats,” the investment bank said.

US President Joe Biden’s top labor official has touted the July jobs report, saying it highlights the ability of the US economy to avoid a recession. 528,000 jobs were added to the economy last month, more than double economists’ expectations. Meanwhile, average gas prices nationwide fell below $4 a gallon for the first time since March, according to the AAA motor club.

Biden also scored a tense legislative victory when passing the Cut Inflation Act. The bill he signed into law this week, among other things, allocates $370 billion for climate and energy programs.

Barclays said its market analysis of past midterm elections over the past 100 years shows stocks tend to perform below average when voting. However, regardless of the outcome, stock performance improves after the end of electoral contests.

“[If] history repeats itself, investors should de-risk in the November election and position themselves for a year-end rally thereafter,” Barclays said. .

Mid-term elections will be held on November 8. In addition to the Senate races, the 435 seats in the House of Representatives must be voted on.

Before that, the Federal Open Market Committee will meet on September 20-21. Policymakers can settle for a 50 basis point rate hike or they can decide on a third consecutive and large 75 basis point hike that would bring the fed funds rate into a range of 3% to 3, 25%. Inflation was 8.5% in July.

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