As we consider the current political landscape and various midterm Election scenarios, investors can turn to exchange-traded funds to capture the potential outcome.

During the recent webcast, Axelrod and Rove on what’s at stake at the halfway point, Karl Rove, the top conservative commentator and strategist, and former deputy chief of staff and senior adviser to President George W. Bush; David Axelrod, senior political commentator for CNN and former senior adviser to President Barack Obama; and Michael Arone, chief investment strategist for US SPDR Business, State Street Global Advisors, walked through the ins and outs of the midterm election and outlined the potential outcomes investors should be prepared for.

Rove said Democrats may be fumbling on the economy, as many politicians remain adamant that America’s economic engine is spinning despite concerns from the average American family. Above all, inflation remains the biggest cost to the average American consumer, with many already seeing sticker shock when it comes to pumps or in their local grocery stores. While employment rates remain robust, Americans are not seeing their cost of living keep up with inflationary pressures, so paychecks are stretched.

In the face of strong inflationary pressures, the Federal Open Market Committee executed its fourth consecutive 75 basis point hike in interest rates, which further increased the pressure on the US economy. Meanwhile, market participants expect the Fed to slow its rate hike with a terminal rate by spring.

Axelrod addressed the messaging problem Democrats face today in getting voters to turn out for midterm elections, which have historically seen lower voter turnout compared to presidential elections. Meanwhile, political runners must simplify complex issues to reach wider audiences, especially independent and casual voters.

Looking ahead, once the dust from the midterm elections has settled, Arone pointed out that on a more positive note, the S&P 500 has historically posted strong returns after a midterm election, on average significantly outperforming pre-mid-term periods. In more than 17 of the last 19 midterm elections since 1946, stocks have outperformed in the six months following an election, compared to the six months before midterms. While a divided Congress would likely mean legislative gridlock, the market has also historically performed better during times when there is a divided Congress.

Additionally, the incumbent president’s political party has lost seats in the US House of Representatives 13 times and the US Senate nine times over the past six decades in 15 midterm elections. The party of a sitting president has historically lost 25 seats in the House, on average. The president’s low approval rating also coincided with more seats lost.

To help prepare portfolios for any outcome, Arone outlined several considerations for how energy policy, defense spending, tax policy and infrastructure programs could be affected depending on whether Democrats or Republicans control Congress. , highlighting various SPDR ETFs that align with each potential outcome.

For example, in the energy sector, the SPDR Kensho Clean Power (CNRG) ETF and the SPDR S&P 500 ETF Without Fossil Fuel Reserves (SPYX) could be games for a Democratic-controlled Congress that would be more supportive of shifting to a climate-friendly political outlook. On the other hand, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the SPDR Oil and Gas Equipment and Services (XES) ETF would be investment ideas for a favorable Republican outcome, which could restrict the implementation of Biden’s favored climate agenda, reducing additional climate investments.

On defense spending, both sides of the aisle favor increased military expansion in the wake of the Russian-Ukrainian war, as well as the future of defense in cyberspace. To capture these potential plays, investors can turn to something like the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) and SPDR S&P Kensho Future Security ETF (NYSEARCA: FITE).

If we see a Republican sweep, the country could likely see the extension of popular tax breaks and a rollback of some of the tax provisions of the Cut Inflation Act, which would likely benefit businesses with revenue. overseas and high buyout activity, as well as with the technology-related sector ETF plays as the SPDR S&P Semiconductor ETF (NYSEArca:XSD) and the SPDR NYSE Technology ETF (XNTK).

On the other hand, if we maintain the Democratic status quo, the country could see increases in corporate and personal taxes. The 1% redemption tax could increase further, which could make dividends more attractive than redemptions for shareholders, which could benefit low-tax sectors as well as high-dividend paying companies. Investors can turn to income games like the SPDR Dow Jones REIT ETF (RWR) and the SPDR S&P 500 High Dividend Portfolio (SPYD).

Financial advisors interested in learning more about investment ideas for the current market environment can watch the webcast here on demand.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.