No Clear Winner in the US Mid-Terms

Monday 14 November 2022

Historically speaking, US mid-term elections have always been negative for the party supporting the sitting President. Only Bill Clinton and George W. Bush have been the two notable exceptions to the rule since the end of WWII, witnessing an increase of their majorities in the House of Representatives.


However, as the vote counting continues, the outlook for both the House and the US Senate remains uncertain. Pre-election polls that were expecting a “red tide” have been proven wrong; markets were expecting a 91% probability of a Republican takeover of the House and 75% odds of a Republican-led Senate, according to a Predictit poll on 4 November. Markets’ response has been subdued, due to their expectation that a Republican majority would have led to a divided government.

We believe that no meaningful legislation will see the light in the next two years, as no party will have a clear majority to impose its views. House Republicans will likely seek higher spending on defence and border security, push for certain businesses tax breaks and an energy infrastructure bill. In general, financial markets prefer a divided government since it means we are unlikely to see policies such as higher taxes and more regulation.

In terms of foreign policy, it would be reasonable to expect a tougher stance against China, perceived as one of the biggest threats to the US economy and security, which will lead to increased export controls, especially in the technology sector. The current US administration is combining the security concerns with a more protectionist agenda, aiming at supporting the domestic industry in climate change and technology.

It is likely that the relationship between the US and the EU will be complicated by this elections. Germany and other EU states want to improve their relationship with Beijing and they seem not to be particularly keen to follow Washington’s “decoupling” strategy. European leaders are also considering the possible return of Donald Trump or another “Trump-like” Republican to the White House in 2024 and prefer to pursue distinct strategic interests that are not fully aligned with the US needs. Tensions between the two Atlantic partners are further increased by the protectionist policies, like the ones defending the US electric vehicle producers.

The main issue at stake for Europe is now the American support to Ukraine. It is likely that, if Washington keeps supporting Kyiv, the war could last for longer and escalate further, as there would be little to no incentive to seek talks. However, if the Republicans will question and disapprove the amount spent on military aid, leading to a decrease of the amounts of money and armaments provided, a ceasefire between Russia and Ukraine in the second half of 2023 becomes more likely.

Source: Amundi Institute, US mid-term election: no red tide, 9 November 2022

Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 10 November 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.
Date of first use: 11 November 2022
Doc ID# 2588898