ETF Strategies For The Midterm Elections

Heading into the mid-term election, which is now just two weeks away, political gridlock in Washington persists. This is especially true as chances of an outcome consisting of a Democratic-controlled House and Republican-majority Senate seems likely.

Per a Washington Post/Schar School poll, 50% of voters support Democratic candidates and 47% support Republicans. An NBC News/Wall Street Journal poll showed that 50% of likely voters want Democrats to control Congress compared with 41%, who want Republicans to maintain control. A RealClear-Politics average of polls gives Democrats a 7.7% generic ballot edge while FiveThirtyEight gives Democrats a six in seven chance of winning the House. CNN’s Harry Enten predicts in The Forecast that Democrats will win a 17-seat majority in the House but Republicans will maintain their slight edge in the Senate.

A number of analysts believe that the divided government or a Democrat win of the House would lead to a government gridlock and prevent the government from enacting new policies, keeping the status quo. A divided policy would probably keep America’s fiscal, trade and regulatory policies on the same trajectory.

The divided government many not actually derail the nine-and-a-half year bull market but might reshuffle the sector winners and losers.

If we go by history, there has been an apparent difference in the performance of the stock market in the fourth quarter since 1982 — between the period before the election and after the election. Stocks have performed markedly better in the period from the start of Q4 to the day prior to the U.S. midterm elections, with the S&P 500 gaining an average of 5.7%, trading positively 100% of the time. On the other hand, the period following the elections doesn’t tend to perform that well as the S&P 500 gained an average of just 2.7% with a positive trade of just 66% of the time.

Given this, investors should focus on some strategies as to which sector should they take positions or which should be avoided if bipartisan government forms. We have highlighted them in detail below:
 
Focus on Pharma