[Practical Finance] One Month Until the U.S. Midterm Elections... Stock Investment Strategies

Hopes for a Market Rebound in October Amid Interest Rate and Oil Price Uncertainty

Focus on Green Energy and Power Grids if Democrats Win Both Houses

As the U.S. midterm elections approach, just over a month away, stock investors are becoming increasingly interested in market trends both before and after the election. Historically, stock prices have often rebounded not only after the election but even in the month prior. However, this year, the combination of U.S. interest rate hikes and rising oil prices adds complexity. Analysts suggest that rather than focusing solely on predicting the election outcome, investors should closely monitor interest rates and supply-demand conditions, and differentiate which sectors stand to benefit depending on the results.

Will the market only rise after the election? In the past, rebounds began in October

In the upcoming midterm elections in the United States on November 3 of this year, all 435 seats in the House of Representatives and 35 Senate seats are up for grabs. Recent analyses point to an advantage for the Democratic Party. According to a public opinion survey compiled by Samsung Securities on September 23, the probability of the Democratic Party securing a majority was 71% for the House and 53% for the Senate. Researcher Yoo Seungmin from Samsung Securities noted, "Republican underperformance and the Democratic lead are becoming more pronounced," and added that negative assessments of President Donald Trump’s performance have also increased.

What investors should pay attention to first is their timing of entry. KB Securities analyzed 19 midterm elections since 1950 and found that in October of election years, the S&P 500 index, led by large-cap stocks, rose by an average of about 3%, with a probability of increase at 74%. There was also a tendency for the market to bottom out approximately 33 days before the election. Applying this to this year's schedule, late September to early October becomes the key period to gauge market direction.

Long-term performance after the elections has also been positive. According to the KB Securities analysis, the average return for the S&P 500 index six months after the elections was 7.4%, and 13.8% one year after, with positive returns in all 19 election years analyzed.

The key factors are economic and interest rate conditions. Lee Euntaek, a researcher at KB Securities, explained, "The midterm election pattern can be a supporting indicator for short-term rebounds, but the long-term trajectory is determined by the economic and interest rate cycle." In fact, in 1978 and 2018, October stock prices underperformed as concerns grew about tighter monetary policy and interest rates surged beyond market expectations. This year, if rising oil prices further push up inflation and increase the risk of additional rate hikes, the traditional pre-election seasonal rebound effect may be muted.

For the Korean stock market, foreign investor flows also warrant monitoring. Choi Jemin, a researcher at Hyundai Motor Securities, commented, "Net foreign buying is heavily influenced by global economic conditions," adding, "With the ongoing U.S.-Iran conflict, oil prices and U.S. Treasury yields remain at high levels. The fact that the Federal Reserve has begun raising the benchmark interest rate to control inflation creates an unfavorable environment for net foreign buying." Therefore, investors aiming to increase holdings of Korean stocks should carefully watch for stabilization in U.S. Treasury yields and oil prices, as well as whether foreign selling is subsiding.

Differentiating sectors expected to benefit from a Democratic win and bipartisan investment fields

In the securities industry, many have focused on sector strategies based on election results, particularly the possibility of a 'blue wave' where the Democratic Party takes both houses. Choi Jemin and Kim Jaeseung, researchers at Hyundai Motor Securities, analyzed that "policy premiums for eco-friendly energy, such as solar power and secondary batteries—priorities for the Democratic Party—could recover." Korean companies with U.S.-based production in solar power, eco-friendly, and energy storage system (ESS) sectors are seen as potential beneficiaries.

Researcher Park Wooyeol of Shinhan Investment & Securities pointed out, "While sentiment in the renewable sector has recently weakened, demand for AI data centers is surging, enabling power grid companies to maintain robust performance." The suggestion is to distinguish between sectors likely to gain from policy expectations and those already enjoying stable demand.

The power grid is considered a sector that will continue to draw investment demand regardless of the election outcome, as both parties agree on the need to expand power generation and transmission infrastructure driven by the growth of artificial intelligence (AI) data centers. Hyundai Motor Securities also noted that nuclear power investment is a shared interest for both parties, but the benefit for Korean companies depends on whether they can participate in U.S. nuclear projects in practice.

For semiconductors, continued investment in AI matters more than the actual election result. Should the Democrats control Congress, regulations related to electricity costs for data centers and local community burdens may become stricter. However, even if data center construction in the U.S. is delayed, it is necessary to separately assess whether this will result in a worldwide reduction in semiconductor demand. Choi Yechang, a researcher at Sangsangin Investment & Securities, commented, "Even if regulations increase, ongoing technological competition with China and the demand for AI commercialization by businesses will sustain investment," adding that "the continued benefits for Korean memory companies are likely to remain."

Even if the Democrats win, it is unlikely that tariffs on automotive and steel sectors will be lifted immediately. The Democratic Party may not be able to fully withdraw existing tariffs, but is more likely to prevent additional increases or an expansion of their scope. The possibility of the U.S. easing its advanced semiconductor export controls on China also remains low. In light of policy continuity in trade matters, it is essential to watch follow-up actions after the election rather than just the outcome itself.

Reviewing exchange-traded funds (ETFs) based on stock trades by U.S. politicians is another strategy. Researcher Park noted, "Both the Republican and Democratic baskets are highly exposed to AI." The Democratic basket concentrates on AI platforms, while the Republican basket focuses more on semiconductors, networks, and power infrastructure. It is worth monitoring policy-driven changes for green energy sectors as influenced by the election, while attention to AI and power infrastructure should include bipartisan interest and tangible investment demand.

This content was produced with the assistance of AI translation services.