At a Glance

• Democrats won the House and Senate. Futures dropped, then recovered before sunrise.
• The Dow is on track for its best day since April 8.
• After futures erased a drop of 2% or more, they fell the next day nearly two out of three times.
• The S&P 500 needs about 2% from Tuesday’s close by Friday to avoid a record-bad midterm window.

A big comeback feels reassuring, but it rarely tells traders what happens next.

Democrats took both chambers of Congress, and futures slid. Buyers stepped in before sunrise, and the Dow is now on pace for its best day since April 8.

Key Details

Tech took the worst of it after a Democrat won the Texas governor’s race, promising to halt new data center construction. Small caps then led the bounce.

Since 1997, when S&P 500 futures fell at least 1% and closed up 1% or more, the following week was about as likely to rise as any other.

In 2016, futures plunged 5% on election night and closed higher the next day. In 2018, stocks gained about 2% the day after the midterm, then lost about 6% over the next month.

Market Reaction

Chips are the weak spot. The iShares Semiconductor ETF (SOXX) has closed below its 200-day moving average for three straight sessions and sits near its July low. The VanEck Semiconductor ETF (SMH) closed under $520 on Monday and Tuesday.

Small caps deserve caution too. The Russell 2000 beat the S&P 500 the day after the vote in only 5 of the past 11 midterms.

Why It Matters

The eight sessions around a midterm vote have posted gains in 18 of 19 midterms since 1950. This year the S&P 500 is down 2% since the Oct. 27 close, worse than 1994’s 1.3% drop.

Rates add pressure. Two Fed officials dissented in favor of a hike on Oct. 28, and central banks have raised rates 42 times in six months.

What to Watch Next

Friday’s close is the test. Beyond that, the longer record leans bullish: from the end of October in a midterm year to June, the S&P 500 has risen in all 19 cycles since 1950, with a median gain of about 15%. The trouble usually comes first.

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Source: Yahoo Finance