Investors may be underestimating the risk stocks face from the midterm elections

Political issues have been among the biggest drivers of trading in the U.S. stock market in 2018, as investors grapple with the uncertainty of trade policy and the economic effect of the tax bill passed late last year. However, another D.C.-related issue may not be getting the attention it deserves on Wall Street.

The U.S. is fewer than 80 days until the midterm elections, an event that could represent a turning point for both the government and the market should the Democratic Party regain a majority in the House of Representatives, the Senate, or both. Current polls indicate strong odds of the former, though flipping the Senate is seen as a longer shot.

Nevertheless, a divided government could be a risk to markets if it results in an increase in political instability and uncertainty. Analysts at Société Générale said that a change in the ruling party of either house “could have serious market and economic consequences, such as potentially more frequent government shutdowns, impeachment considerations and general uncertainty.”

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