The US markets have been on a bit of a tear over the past month or so. Since 12 October, the S&P 500 Index (SP: .INX) has gained more than 6% – not a bad return for under a month. Saying that, the S&P 500 remains down a depressing 20% or so over the year to date. So things haven't been too rosy over stateside.
But perhaps the US markets could be set for a major boost this week.
The Americans are about to hold their midterm elections. No, president Joe Biden isn't up for reelection just yet. His term expires in January 2025, with the next presidential election to be held in November 2024.
But under the American political system, all members of the lower house, the House of Representatives, are up for re-election every two years. As are a third of the Senate. And these midterm elections are scheduled for this week.
At the moment, the president's Democratic Party controls both chambers of congress by slim margins. But control of one or both Houses could well change this week. This would deliver what is known as 'divided government'.
For a law to pass in the US, it must pass through both houses of congress, and be approved by the president. As such, it is harder to pass laws when control of congress is divided between the parties.
Divided government could help boost the US stock market
According to reporting in Reuters, the opposition Republican Party looks likely to gain control of at least the House, and possibly the Senate. As such, it looks as though the US is heading towards divided government. This, according to the report, would be seen as a positive for markets:
A split government could result in political gridlock that stymies major policy changes, an outcome that investors see as favorable for equities.
Regardless of the winner, past midterm elections have ushered in a period of positive market performance, something investors would welcome after a year in which the S&P 500 has declined by nearly 21%.
Divided government could also lead to a renewed push for increased US energy production. As well as higher defence spending and changes to healthcare and pharmaceutical laws or regulations.
It would also likely move the US away from the possibility of federal cannabis legalisation, which has historically weighed down the domestic cannabis industry in the US.
But overall, it seems that divided government would be a positive tailwind for the US markets, and possibly by extension, the S&P/ASX 200 Index (ASX: XJO).
Remember, the ASX is heavily influenced by what happens across the Pacific. So keep your eye on America this week as the outcome of the midterm elections becomes clear. It could well have an impact on the US stock market and our own.
