If in the midterm elections on November 3 the incumbent president's party loses its majority in both chambers of Congress, the U.S. stock market will most likely head higher. This scenario has already played out seven times out of seven — every time a Republican president was in office and Democrats took control of both the House of Representatives and the Senate.

Statistics like this draw the attention of investors who follow the portfolio of Michael Burry — the investor who predicted the 2008 mortgage crisis and became the prototype for the protagonist of the film "The Big Short." It is precisely his strategies and the trades of large hedge funds that formed the basis of this observation.

How the market reacted before

Since 1954, Democrats have taken the majority in both chambers seven times under a Republican president: under Eisenhower, Nixon, Ford, Reagan, and both Bushes. The dynamics of the S&P 500 index after each such case looked like this:

  • after one month, the index gained an average of 2.1%, and was up six times out of seven;
  • after three months, a gain of 10.7%, up all seven times;
  • after six months, a gain of 17.5%, up all seven times;
  • after a year, a gain of 15.5%, up all seven times.

Simply put, anyone who bought stocks right after such elections always ended up in profit a year later. The only unpleasant moment was in 1974 under Ford, when the index fell 10.3% in the first month. But in 1954 under Eisenhower, the market grew 33.2% over the year.

When the results come in

On November 3, the U.S. holds its midterm elections — they are called that because they fall in the middle of the presidential term. Americans elect all 435 members of the House of Representatives and 35 of the 100 senators.

Currently, Republicans hold the majority in both chambers, but the margin is small. Democrats need to flip just three seats in the House and four in the Senate to take control.

Timing in Moscow time:

  • polling stations in the eastern states open on November 3 at around 14:00–15:00 Moscow time;
  • the first polling stations close at 02:00 on November 4 — that is 18:00 U.S. East Coast time;
  • the main wave of closures runs from 03:00 to 07:00 on November 4;
  • the last polling stations, in Alaska, close at 09:00 on November 4.

The first results will begin coming in right after 02:00 on November 4 Moscow time. Winners are declared not on the basis of a full count, but on projections based on ballots already processed, so the breakdown for the House of Representatives will most likely be clear by the morning of November 4 Moscow time.

The Senate may be trickier: there are many close races there, and in some states mail-in ballots are counted for a long time, so the outcome may only be announced after several days.

When the president and the congressional majority belong to different parties, they get in each other's way when it comes to passing drastic laws. Business and investors like this: the rules of the game change more slowly, which means fewer surprises. That is why the market often greets such a setup with a rally.

Cryptalist analysis: The historical correlation between divided government and S&P 500 growth reflects primarily a reduction in regulatory uncertainty rather than the market's political preferences. For the cryptocurrency sector, the "frozen" Congress scenario means a lower risk of harsh legislative initiatives in the short term, but a statistical sample of seven observations is not a reliable basis for a trading strategy — investors should take into account the macroeconomic context, not just the political setup.