By Saqib Iqbal Ahmed, Carolina Mandal and Laura Mathews
nuevaNew YorkNovember 8 — Investors hope Republicans will win the US midterm election, an outcome that is likely to undermine Democratic spending and regulation, but set off a bitter fight over raising the US debt limit. America subsequent years.
Polls and betting markets indicate Republicans are the favorites to take control of the House of Representatives, while the Senate race is closer, with votes still being counted in some states.
With Democratic President Joe Biden in the White House, this result would lead to a divided government, 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.
Morgan Stanley analysts 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 ceilings. Is.
This Could Support a Rally in the Treasuries America That said 10 more years to help the stock extend its recent gains.
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.”
Mahajan said, “More broadly, it gives businesses an opportunity to learn, plan and budget that new laws, regulations, tax reforms, etc., cannot be passed in this environment.”
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.
The average annual return of the S&P 500 has been 14% with a divided Congress and 13% with a Republican Congress under a Democratic president, as analyzed by data from 1932. RBC capital market. 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.”
Pending 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 soared this year, but a government shutdown may help contain them. and for dollarsBecause it allays concerns about higher fiscal spending that could fuel 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.
Equity options market America Relatively poised for peace, Democrats’ surprisingly strong results could destabilize markets.
