As the midterm elections approach, which four signals should investors watch?

Original title: The Midterm Election Signals Investors Should Watch

Original author: Monica Guerra, Morgan Stanley Wealth Management

Editor's note: As the 2026 U.S. midterm elections draw closer, political news is beginning to re-enter investors' field of view. But for the market, the more important question than tracking campaign rhetoric every day is: which signals are truly worth watching, and through what channels will they affect asset prices?

The answer from Morgan Stanley Wealth Management is a framework composed of four indicators: the Midterm Signal Monitor. These are generic congressional ballot polling, presidential approval ratings, consumer confidence, and gasoline prices. They correspond respectively to party support, approval of the incumbent administration, households' perception of the economy, and the most direct cost-of-living pressure. Morgan Stanley emphasizes that these indicators are better suited as directional signals for judging changes in the political environment, rather than directly predicting the final congressional seat count.

Behind these four indicators is actually the same question: how do American voters feel about the economy? Even though the inflation rate has fallen from its peak, the price levels of food, housing, healthcare, and energy remain significantly higher than several years ago, making the cost of living an important issue in this election cycle. A Reuters/Ipsos survey also shows that the cost of living remains a issue of high concern for voters.

For investors, what ultimately needs to be observed is not any single poll itself, but whether these signals are enough to change the structure of congressional power and further translate into changes in regulation, taxation, and industry policy. Morgan Stanley particularly highlights the policy sensitivity of the technology and energy sectors, but at the same time believes that the business cycle, corporate fundamentals, interest rates, and the AI investment cycle may still matter more than the election itself.

The following is a translation of the original article:

As the U.S. midterm elections enter their final phase, investors need to confront a familiar question: to what extent should politics enter market pricing?

Morgan Stanley's answer is not to predict who will ultimately control Congress, but first to observe four signals.

The Midterm Signal Monitor established by its wealth management division mainly tracks: generic congressional polling, presidential approval ratings, consumer confidence, and gasoline prices.

What these four data points actually cover are several of the most critical transmission channels of the midterm elections—which party voters are more inclined to support, how they evaluate the incumbent government, how they perceive the current economy, and the most intuitive price pressure in daily life.

As of the time the article was published, these indicators on the whole showed that the U.S. political environment is undergoing significant changes. But Morgan Stanley also emphasizes that they can only help judge the electoral environment and cannot be directly equated with a prediction of the final control of Congress.

Signal One: Congressional polling—what the market really cares about is the power structure

The first item is the generic congressional ballot, that is, a survey of general congressional voting intention that is not aimed at specific candidates.

Unlike polls in a single district, it usually asks voters which party they would be more inclined to support if congressional elections were held today. Therefore, this data is more like a thermometer for measuring the national political climate, rather than a tool for predicting specific seats.

Morgan Stanley data shows that from August to September, in the congressional generic ballot surveys it tracked, the Democratic lead widened from 6.1 percentage points to 8.1 percentage points.

For investors, the point is not these few percentage points themselves, but whether they signal that the possibility of a change in the structure of congressional power is changing.

The reason is simple: the market does not directly trade "which party is leading." What truly affects asset prices is the ability to legislate and regulate after the election. If the president's party controls both the White House and Congress, major fiscal, tax, and regulatory agendas usually have greater room to advance; conversely, if a divided government is formed, it usually becomes more difficult for large-scale policy adjustments to pass Congress.

Therefore, what is truly worth the market's attention in congressional polling is its indication of future policy space.

Signal Two: Presidential approval—observing the "incumbent party pressure" in midterm elections

The second indicator is the presidential approval rating.

Midterm elections are often not merely contests among local candidates, but are also influenced by voters' evaluations of the incumbent government. Therefore, the presidential approval rating can help investors observe the political environment facing the ruling party.

Morgan Stanley data shows that at the time the article was published, the presidential approval rating it tracked was about 40%, a slight rebound from the previous 39.5%, but still within a range that historically usually means the ruling party faces greater midterm election pressure.

A common misconception should be avoided here: a low presidential approval rating cannot mechanically lead to the conclusion that a certain party will necessarily lose a certain number of seats. What is truly useful is to put it together with indicators such as congressional polling and consumer sentiment, and see whether different signals point in the same direction.

If multiple indicators deteriorate at the same time, then the market's expectations for the future congressional landscape and policy path may undergo more obvious adjustments.

Signal Three: Consumer confidence—good economic data does not mean voters feel good

Compared with political polling, the third indicator is more directly linked to the economy: consumer confidence.

In the data cited by Morgan Stanley, consumer confidence fell from 51.7 in August to a preliminary reading of 47.8 in early September, significantly below its historical election-year average.

The importance of this indicator lies in the fact that it can help explain a seemingly contradictory phenomenon: macroeconomic data and voters' actual feelings are not always consistent. Even if the U.S. inflation rate has already fallen明显 from its peak, that does not mean the price increases of the past few years have been reversed.

Falling inflation means prices are rising more slowly; a still-high price level means things have not become cheaper again. After years of cumulative increases in high-frequency spending such as healthcare, food, housing, and energy, households still have to face higher daily expenses. Morgan Stanley therefore believes that a core economic theme of this midterm election cycle is not simply "inflation," but the broader issue of affordability, that is, the affordability of the cost of living.

This is also why consumer confidence deserves to be observed separately: what it measures is not GDP or corporate profits, but how voters themselves feel about the economy. For the market, if economic growth remains stable but consumer sentiment continues to deteriorate, it means there may be a divergence between economic fundamentals and political feedback.

Signal Four: Gasoline prices—the most direct "wallet indicator"

The fourth signal may also be the most intuitive one: gasoline prices.

Energy prices are different from many macroeconomic indicators. Consumers do not need to read the CPI report; they can feel price changes every time they refuel. Morgan Stanley therefore includes gasoline prices separately in its midterm election monitoring framework. Its data shows that as of the time the article was published, the year-over-year increase in regular gasoline prices had further widened.

More importantly, the impact of fuel prices does not stop at the gas station. Rising diesel and transportation costs may also further pass through to logistics, food, and other daily necessities prices. Therefore, energy prices are not only an independent cost-of-living indicator, but may also reinforce consumers' perception of overall prices.

This means that in the final weeks before voting day, trends in gasoline prices may more easily enter voters' perception directly than some low-frequency macroeconomic data. But it should also be noted that energy prices are only one of many factors affecting voting behavior and cannot be used alone to infer election results.

After the four signals, what investors really need to watch is policy risk

Putting these four indicators together, Morgan Stanley is in fact providing investors with a relatively clear chain of observation: congressional polling shows party support -> presidential approval shows governing pressure -> consumer confidence shows economic sentiment -> gasoline prices show the most direct cost-of-living pressure.

But this chain must ultimately land in the market. For investors, the most important impact of the midterm elections is not the result on voting day itself, but which policy expectations need to be repriced after changes in the structure of congressional power.

Morgan Stanley particularly mentions two sectors.

One is technology. If the structure of congressional power changes, some technology companies may face more scrutiny regarding competition, data privacy, and artificial intelligence. Even if no major new legislation is ultimately formed, congressional hearings and regulatory discussions may increase policy uncertainty.

The other is energy. With energy prices already having become an issue in voters' cost of living, energy companies may face more political attention related to prices, taxes, and fossil fuel policy.

The key word here is still "may."

A change in congressional control does not mean that new policies will necessarily pass; an increase in regulatory discussion does not mean that corporate earnings will immediately change. What investors truly need to observe is whether political changes can move from campaign issues into legislative and regulatory procedures.

The final signal: don't let the election overshadow the variables that truly determine U.S. stocks

The final reminder from Morgan Stanley is instead not to overtrade the midterm elections.

Historically, divided government does not necessarily mean worse stock market performance. The institution's historical statistics show that in samples during Republican presidencies, in the year after the midterm elections, if Congress was controlled separately by the two parties, the S&P 500 recorded a relatively high historical average return. One explanation offered by Morgan Stanley is that political gridlock may reduce the probability of sudden major policy changes.

But historical average performance cannot be used to predict market returns after this election.

Therefore, as the midterm elections approach, investors can focus on four signals: congressional polling, presidential approval, consumer confidence, and gasoline prices. Among them, the first two help judge whether the political landscape is changing, while the latter two help judge whether cost-of-living pressure is continuing to affect voter sentiment.

What truly needs to be confirmed next is the next step: whether these signals will ultimately translate into changes in the structure of congressional power, and whether the new congressional structure can further change tax, regulatory, and industry policy.

Before that, the midterm elections are better treated as a policy risk variable rather than an independent market direction indicator. As Morgan Stanley emphasizes, the business cycle, corporate fundamentals, inflation, interest rates, and the AI investment cycle may still be more important factors affecting market performance.

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