With Democratic President Joe Biden in the White House, that outcome would lead to a divided government, a result that has historically been accompanied by positive long-term stock market performance.
Early results from the US mid-term elections showed Republican victories, although the prospect of a national “red wave” seemed to have dimmed. The Senate, currently controlled by Democrats, remains too close.
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.
The analysts of Morgan Stanley they wrote this week that a strong Republican showing would likely allay investor concerns about rising fiscal spending, which drives inflation, and increase the chances of the party freezing spending through the debt ceiling.
That could support a rally in 10-year US Treasuries and help stocks extend their recent gains.they said.
A lockdown scenario “removes a little bit of uncertainty,” said Mona Mahajan, senior investment strategist at Edward Jones. “Some of the trends around fiscal spending and tax reforms had been worrying to some investors, especially in this inflationary environment.”
“More broadly, it gives businesses the opportunity to prepare, plan and budget knowing that new laws, regulations, tax reforms, etc. may not be passed in this environment.Mahajan said.
Historically, indices have 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.
The S&P 500’s average annual return has been 14% with a divided Congress and 13% with a Republican Congress under a Democratic president, according to data going back to 1932 analyzed by RBC Capital Markets. That compares to 10% when Democrats controlled the presidency and Congress.
A Republican Congress could end fiscal stimulus and make “the Fed’s job a little bit easier to break inflation,” said Troy Gayeski, chief market strategist at FS Investments.
Waiting for the results of the elections, the S&P 500 was up 0.6% on Tuesday. The benchmark index has risen about 5% in the past month, paring its year-to-date decline to about 20%.
Still, a divided government could spark tensions over raising the federal debt ceiling in 2023, leading to a battle as protracted as the one that led Standard & Poor’s to downgrade the United States’ credit rating. United for the first time in 2011, shaking the financial markets.
US Treasury yields, which move in the opposite direction to bond prices, have soared this year, but the government shutdown could help contain them and the dollar as it eases concerns about higher fiscal spending that could boost inflation.
Conversely, a Democratic surprise could mean a stronger dollar and higher yields, as potential fiscal expansion could require more rate hikes, according to analysts at Morgan Stanley.
With the US equity options market poised for relative calm, a surprisingly strong result from the Democrats could unsettle markets.
Source: Ambito
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