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Friday, December 9, 2022

Wall Street plunged after the US elections.

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Control of Congress was still up for grabs early Wednesday, with many of the most competitive races still unresolved, making it unclear whether Republicans would break the tenuous Democrats’ hold. Prospects for a “red wave” had evaporated, although Republicans remained favorites to win a majority in the House of Representatives.

“We’re in a bit of a different situation and it looks like the Biden presidency hasn’t taken a massive hit from this mid-term election, so the markets are on hold,” said Danni Hewson of AJ Bell in London.

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Although macroeconomic concerns and Federal Reserve monetary policy have been the dominant forces driving market moves this year, politics from Capitol Hill could influence asset prices.

If the Republicans manage to gain control of the House of Representatives, it will mean a divided government with Democrat Joe Biden in the White House, an outcome that has historically been accompanied by positive long-term stock market performance.

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Morgan Stanley analysts wrote this week that a strong Republican result could allay investors’ concerns about an increase in fiscal spending that exacerbates inflation and increase the chances that the party will freeze spending through the debt ceiling. This could support a rally in 10-year Treasuries and help stocks extend recent gains, they said.

Stocks have historically tended to do better under divided government when a Democrat is in the White House, with investors attributing some of that performance to political gridlock preventing major political change.

Analysts forecast a negative reaction in equities if Democrats managed to hold on to majorities in the House and Senate, and experts at Goldman Sachs said there was a risk that additional corporate tax hikes would weigh on earnings. and the risk that interest rates would be higher to offset the likely additional expense.

Source: Ambito

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