Midterm elections: What to watch in markets as America votes

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It's midterm Election Day in the United States, and while the conventional wisdom has some strong ideas about how it will play out, increasing uncertainty around polling (and a contentious electorate) suggest anything might happen.

Midterm elections typically go against the party of the president - and if that holds, and Republicans take over even just the House (let alone the currently split Senate), it effectively would mean a sidelining of the vast majority of President Biden's agenda for the remaining two years in his term.

That's not always bad for securities markets (NYSEARCA:SPY), where "gridlock" has often been received by investors as "status quo" - or, more specifically, the lack of any broad or shocking changes on tap that tend to spook investors and spur market declines.

"History suggests the midterms are a big influence on markets as they always seem to rally once midterms (or presidential elections) are out of the way," Deutsche Bank's Jim Reid said. "Our economists' base case is that Republicans will take the House but Democrats will maintain their slim majority in the Senate," he added.

For what it's worth, world's richest man Elon Musk is now Twitter's CEO and sole director, and urged his more than 100 million followers on the service to go GOP: "I recommend voting for a Republican Congress, given that the Presidency is Democratic."

While the issues at stake in the election's various races are numerous - including gun control, abortion and immigration - investors will be focused on a few that have risen to the fore as election season has rumbled on, notably the broader economic slowdown and this year's historic inflation.

And while party polarization seems to be at historic highs, when it comes to business and investing, there are areas where the two parties are closer together than others. For example, where the parties agree on infrastructure spending, real estate, construction and utilities could benefit.

ESG investing (Environmental, Social and Governance) is indirectly on the ballot, as Republicans increasingly tap the issue as a political talking point. If the GOP makes a strong showing, you can expect the pressure on ESG investing to increase. Some of the popular ESG-themed exchange-traded funds: Invesco MSCI Sustainable Future ETF (ERTH), ALPS Clean Energy ETF (ACES), Fidelity Clean Energy ETF (FRNW), KraneShares MSCI China Environment Index (KGRN), Invesco MSCI Green Building ETF (GBLD), iShares S&P Global Clean Energy Index ETF (ICLN), Invesco Solar Portfolio ETF (TAN), Global X Wind Energy ETF (WNDY), CleanTech ETF (CTEC), Global X Solar ETF (RAYS), ProShares S&P Kensho Cleantech ETF (CTEX), First Trust Global Wind Energy ETF (FAN), iShares ESG Aware MSCI USA ETF (ESGU), Vanguard ESG U.S. Stock ETF (ESGV), and the SPDR S&P 500 ESG ETF (EFIV).

And conversely, the "anti-ESG" fund God Bless America ETF (YALL) launched last month, with a focus on screening out companies it considers activist.

Still, clean energy subsidies aren't as contentious as other issues, so it may be unlikely that President Biden's signature achievement on climate legislation will be unwound. Oil may be another matter: The idea floated by Biden for a windfall tax on Big Oil will be essentially dead if Republicans gain power. (By the by, the U.S. oil rig count has more than doubled during the Biden administration.)

Technology is another area where the parties have diverged more in recent years, though perhaps more on style: Both parties have argued for more regulation on tech, for different reasons. The Biden administration has been concerned with concentrated power and antitrust action against the tech giants, including Meta Platforms (META), Alphabet (GOOG) (GOOGL) and Amazon.com (AMZN), while Republicans have targeted social media on speech-related issues, and say they won't back some currently stalled antitrust bills - which could be a boon for those giants currently in the crosshairs.

Cannabis is on the ballot: Recreational marijuana use is a question in five states (Arkansas, Maryland, Missouri, North Dakota and South Dakota), and outside of Maryland, whether the measures will get adopted is an open question. Watch multistate operators including Cresco Labs (OTCQX:CRLBF); Columbia Care (OTCQX:CCHWF); Trulieve Cannabis (OTCQX:TCNNF); Green Thumb Industries (OTCQX:GTBIF); Curaleaf Holdings (OTCPK:CURLF); MedMen Enterprises (OTCQB:MMNFF); Acreage Holdings (OTCQX:ACRHF); Ayr Wellness (OTCQX:AYRWF); Verano Holdings (OTCQX:VRNOF); and Jushi Holdings (OTCQX:JUSHF), as well as ETFs: AdvisorShares Pure Cannabis ETF (YOLO), Amplify Seymour Cannabis ETF (CNBS), ETFMG Alternative Harvest ETF (MJ), AdvisorShares Pure US Cannabis ETF (MSOS), and Global X Cannabis ETF (POTX).

And of course, closely following on election night's news will be Thursday's CPI report, where new data on inflation might amplify the impact of any Tuesday ballot-related effect on markets.

One thing important for election observers to remember: It's extremely unlikely we'll know the results of every race during election night, as many states with more mail-in ballots will likely need more time or even much more time to count them (particularly in the number of states that disallow counting mail-in votes until Election Day arrives, including Pennsylvania and Wisconsin). And that means even knowing who controls part of Congress might still be in question on Wednesday or beyond.

Also, control of the extremely close Senate may depend on such factors as automatic recounts, or another Georgia run-off that could delay knowing the answer into December. Check in with Seeking Alpha News once the polls close Tuesday evening to keep track of market-moving developments as they happen.