That result would lead to a divided government, with Democratic President Joe Biden in the White House, An outcome that has historically been accompanied by positive long-term stock market performance.
Early results from the US midterm elections showed a Republican victory, although the prospect of a national “red wave” was reduced. The Senate currently controlled by Democrats is very close.
While macroeconomic concerns and the Federal Reserve’s monetary policy have been the major forces driving market movements this year, Capitol Hill politics could influence asset prices.
analysts of Morgan Stanley He wrote this week that a strong Republican performance would likely allay investor concerns about rising fiscal spending, which drives inflation, and the possibility of freezing party spending through debt limits.
This could support the rally in the 10-year US Treasury and help stocks extend their recent gains.They said.
A lockdown scenario “takes away some of the uncertainty,” said Mona Mahajan, senior investment strategist at Edwards Jones. “Some of the trends around fiscal spending and tax reform were worrying for some investors, especially in this inflationary environment.”
“More broadly, it gives businesses the opportunity to learn, plan and prepare budgets that new laws, regulations, tax reforms, etc. cannot be passed in this environment.Mahajan said.
Historically, indices have tended to outperform under a divided government when a Democrat is in the White House, with investors blaming some of that performance on the political stalemate preventing major political change.
According to data from 1932 analyzed by RBC Capital Markets, the average annual return of the S&P 500 has been 14% with a split Congress and 13% with the Republican Congress. This compared to 10% when Democrats controlled the presidency and Congress.
Troy Gesky, chief market strategist at FS Investments, said a Republican congressional could end fiscal stimulus and “make the Fed’s job a little bit easier to break inflation.”
Waiting for election results The S&P 500 was up 0.6% on Tuesday. The benchmark index is up nearly 5% in the past month, reducing its year-on-year decline to nearly 20%.
Still, a divided government could build tensions over raising the federal debt limit in 2023, leading Standard & Poor’s to fight a protracted battle to downgrade the credit rating of the United States. financial markets.
US Treasury yields, which move in the opposite direction to bond prices, have risen this year, but the government shutdown could help them control more the dollar as it eases concerns about higher fiscal spending. which can lead to inflation.
Conversely, a Democratic surprise could mean a stronger dollar and higher returns, according to analysts at Morgan Stanley, as a potential financial expansion could require more rate hikes.
The US equity options market is set to remain relatively calm, with a surprisingly strong result from the Democrats that could destabilize the markets.
