[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 are now just over a month away, stock investors are paying increased attention to how the markets will behave before and after the vote. In the past, stock prices often rebounded not just after the election, but even starting a month prior to the event. However, this year, the simultaneous rise in U.S. interest rates and oil prices is a new factor. As a result, analysts recommend focusing less on predicting the outcome and more on monitoring interest rates and supply-demand dynamics, as well as identifying which sectors could benefit depending on the results.

Will Stocks Only Rise After the Election?...Historically, They Rebounded From October

For the U.S. midterm elections scheduled on November 3 next month, all 435 seats in the House of Representatives and 35 Senate seats are up for grabs. Recent analyses indicate that the outlook favors the Democratic Party. According to a public opinion poll released by Samsung Securities on September 23, the Democratic Party’s probability of securing a majority was 71% for the House and 53% for the Senate. Yoo Seungmin, a researcher at Samsung Securities, noted that “the Republican Party’s weakness and the Democratic Party’s lead are becoming more pronounced,” adding that President Donald Trump’s approval ratings have also worsened.

The first thing for investors to consider is the timing of purchases. According to KB Securities’ analysis of 19 midterm elections since 1950, the S&P 500 index—centered on large-cap stocks—rose by an average of about 3% in October during election years, with a probability of an increase at 74%. There was also a tendency for the market to hit bottom approximately 33 days prior to the election. Applying this to this year’s calendar, the period from the end of September to early October is a key time to gauge market direction.

Market performance was also strong in the longer term after elections. KB Securities found that the average return on the S&P 500 index was 7.4% six months after the election and 13.8% after one year, and both periods registered positive returns across all 19 election cycles studied.

The crucial factors are the economy and interest rate conditions. Lee Euntaek, a researcher at KB Securities, explained, “The midterm election pattern can serve as a short-term indicator suggesting rebound potential. However, it’s the economy and interest rate cycle that determine the longer-term direction.” In fact, in 1978 and 2018, amid greater-than-expected tightening concerns and surging interest rates, stock performance in October was lackluster. This year as well, if rising oil prices push inflation higher, leading to further interest rate hike concerns, the usual seasonal rebound effect ahead of the midterms may be diminished.

In the Korean stock market, foreign investor flows are also important. Choi Jemin, a researcher at Hyundai Motor Securities, noted, “Foreign net buying is highly influenced by the global economic environment. With the war between the U.S. and Iran continuing, oil prices and U.S. Treasury yields remain elevated, and the Federal Reserve has begun raising its policy rate to tackle inflation. This is not an ideal environment for continued foreign net buying.” He advised that investors seeking to increase exposure to domestic stocks need to monitor whether U.S. Treasury yields and oil prices are stabilizing, and whether foreign selling is tapering off.

Identify Sectors Likely to Benefit From Democratic Wins and Bipartisan Investment Areas

In the securities industry, strategies for responding to the election’s outcome have centered on the possibility of a “blue wave,” in which the Democratic Party secures both the House and Senate. Choi Jemin and Kim Jaeseung, researchers at Hyundai Motor Securities, analyzed that “the policy premium for areas prioritized by Democrats such as solar, secondary batteries, and other clean energy segments could revive.” Korean companies with domestic production bases in solar, clean energy, and energy storage systems (ESS) are seen as potential beneficiaries.

Park Wooyeol, a researcher at Shinhan Investment Corp., pointed out, “While sentiment toward renewable energy has recently weakened, power grid companies are maintaining performance thanks to the surging demand for AI data centers.” This highlights the need to distinguish between sectors with policy-driven expectations and those with already confirmed demand.

The power grid segment is considered an area where investment demand will persist regardless of the election results. This is because both parties agree on the need to expand power generation and transmission networks as the number of artificial intelligence (AI) data centers grows. Hyundai Motor Securities also sees nuclear power investment as a bipartisan area of interest, but believes that Korean companies’ benefits depend on whether they can actually participate in U.S. nuclear power projects.

For semiconductors, what matters more than the election outcome is the continuation of AI-related investment. If the Democrats secure control of Congress, regulations regarding power costs and local community burdens for data centers may tighten. However, even if some U.S. data center construction is delayed, the broader issue is whether this will reduce overall global demand for semiconductors. Choi Yechan, a researcher at SangSangIn Securities, analyzed that, “Even if regulatory hurdles increase, investment will continue to be supported by competition with China over technology and the commercialization of AI by corporations. Korean memory chip makers should continue to benefit as well.”

Even if the Democrats win, tariffs affecting the automotive and steel sectors are unlikely to be lifted immediately. Even with full control of Congress, it would be difficult for the Democratic Party to completely rescind existing tariffs, though the probability of additional hikes or broader coverage could be limited. The chances of the U.S. lifting advanced semiconductor export controls on China also remain low. It is thus advisable to wait for actual post-election policy decisions rather than focus solely on the election results, given the continuity of trade policy.

Another strategy is to examine Exchange Traded Funds (ETFs) based on the investment patterns of U.S. politicians. Park, the researcher, analyzed that “both Republican and Democratic baskets had high exposure to AI.” The Democratic basket focused on AI platforms, while the Republican basket emphasized semiconductors, networks, and power facilities. Clean energy sectors merit attention regarding policy changes by the election, while AI and power infrastructure attract bipartisan interest and real investment demand.

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