Donald Trump will be humiliated within days, but the midterm elections will be good news for share prices, says HAMISH MCRAE

Everyone in the capital here is preoccupied with the outcome of the midterm elections, now just nine days away.

It’s a huge political story: the near certainty that the Democrats will take control of the House of Representatives and a chance that they will also capture the Senate. Either way, Donald Trump will be humiliated.

But there’s another story that hasn’t attracted nearly as much attention – the financial one. 

It is the overwhelming probability that the result will be good for share prices, clearly in America and also most likely for other markets including the UK.

That’s not an anti-Trump comment, or a pro-Trump one for that matter. It’s simply an observation of what we know from history.

In every 12-month period after the midterms since 1950, the S&P 500 index has risen, with an average gain of 15 per cent.

The largest rise was 43 per cent after the elections of 1954 and the smallest just 3 per cent in the months after the 1986 vote. However, that took in Black Monday on October 19, 1987.

So, even allowing for the worst single-day crash in Wall Street history, US shares managed to eke out a gain in the year after the midterms.

I hadn’t realised this until I came here this week, and I find it pretty amazing. You see the point: it’s perfectly possible that equity markets will have a bumpy ride in the months ahead, but even if there’s another crash, history tells us that investors will still end up ahead.

There’s another lesson from the past. It is that Wall Street likes gridlock. It particularly likes the two houses of Congress to be controlled by different parties.

This means they can’t agree on anything substantial and, if they don’t enact any disruptive legislation, that leaves businesses to get on with making money.

Under Republican presidents, the highest share returns since 1950 have come with a divided Congress, so the most likely outcome now of a Democratic House of Representatives and a Republican Senate would seem ideal.

US corporations are making terrific profits, with earnings of S&P 500 members 29 per cent up year on year. If they can manage that with all the stuff that has been thrown at them – tariffs, inflation, war, rising interest rates – the prospect of a hobbled President and a gummed-up Congress is a pretty attractive one.

So what does this mean for the UK? Well, we have our own local difficulties, of which we will learn more in the Budget, but from the perspective of UK savers another year of positive US equity markets would be a comfort.

That’s not simply because US gains have boosted the portfolios of UK investors – typically we have more than half of our equity holdings invested in US stocks. 

It is also that the general movement of London shares follows what happens in New York. That’s because we’re a minnow in global equity markets, about 3 per cent of the world total, whereas the US accounts for more than half of it.

There’s a wider point here that you become very aware of in America. People here invest in equities. A third of US household net worth is in shares or mutual funds, and only a quarter in residential property. In the UK it’s 8 per cent in equities (aside from workplace pensions) and up to half in homes. Thus there is a huge pool of risk money available to fund American businesses that simply does not exist in the UK.

Why? It may be to do with our tax system. Capital gains on your main home are free of tax, whereas investors in equities are hit for gains unless they have the money in a pension pot or Isa.

We don’t even index our gains, so you pay tax even if, allowing for inflation, you have lost money in real terms. And then we wonder why so many of our start-ups have to seek funding in America and grow their business there.

So our loss is their gain. Let’s remember that – and let’s remember too, amid all the political noise of the next few days, the pithy observation of President Calvin Coolidge in 1925: ‘After all, the chief business of the American people is business.’

And they are rather good at it.