US Midterms’ Impact on Indian Markets, Oil Prices, and Bond Yields

The upcoming US midterm elections scheduled for November are expected to play a significant role in shaping the short-term direction of global equity markets. Analysts note that historically, stock markets often show strong gains following midterm results, but this time, the rally might be limited due to persistently high bond yields and elevated crude oil prices.

Looking specifically at Indian equities, the connection to US market trends is not straightforward. Since 1998, when foreign investors gained greater access to India’s stock markets, Indian equities have posted an average return of about 4 percent over six months and 26 percent over a year following midterm elections. However, the Indian market has also experienced declines in some cycles, indicating inconsistent performance relative to US equities during the third year of a US presidential term.

These observations suggest that while a positive global environment could support Indian stocks, the actual performance will depend on domestic factors such as corporate earnings growth, stock valuations, and foreign capital inflows. Investors should not assume a guaranteed spillover of US market gains into India.

Geopolitical Considerations for India

Beyond market returns, analysts from Emkay Global highlight that the US midterms may have more profound geopolitical implications for India. If the Democrats retain control of Congress, there could be increased scrutiny on US tariffs and immigration policies. However, this development might not significantly ease the current trade tensions or diplomatic challenges between the two countries.

The brokerage’s October 30 report, coauthored by Madhavi Arora and Harshal Patel, also warns of a potential escalation in conflicts involving Iran after the elections. Such developments could strain India’s balance of payments and pressure the rupee due to rising energy costs and broader external vulnerabilities. Higher crude oil prices driven by geopolitical tensions would likely weigh on domestic equity markets as well.

Historical Performance of US Equities Post-Midterms

US stock markets have tended to perform well following midterm elections. The S&P 500, for instance, has historically gained an average of around 6 percent over the 60 trading days after midterms, 12 percent over 120 days, and 17 percent after 180 days. Still, Emkay Global cautions investors against assuming these trends will repeat in the current cycle. They point out that US equities have already priced in much of the typical midterm rally, while ongoing inflationary pressures, driven by high bond yields and oil prices, make markets vulnerable to a potential economic slowdown.

The Effects of Political Gridlock

Jyotivardhan Jaipuria, founder of Valentis Advisors, suggests that a divided Congress could be more beneficial for equities than a Democratic sweep. Political gridlock often restrains excessive government spending and supports a balanced policy environment, which can be favorable for bond markets. However, Jaipuria emphasizes that rising global bond yields remain the primary risk factor for equity markets at present.

For Indian investors, a rebound in corporate earnings alongside more attractive valuations may provide some cushion. Nevertheless, the continuation of any market rally will depend heavily on external financial conditions. Persistent increases in bond yields around the world and geopolitical uncertainties continue to challenge the outlook for Indian equities.

In summary, while the US midterm elections could spark some market movement globally, including in India, the impact will be shaped by a complex mix of local and international factors. Investors should remain mindful of geopolitical risks, global interest rate trends, and commodity price fluctuations as they assess their portfolios in the coming months.