Surprisingly close U.S. midterms keep investors on edge: What market observers are saying
Investors on Wednesday are grappling with an unclear outcome in the U.S. midterm elections, as a better-than-expected showing by Democrats muddies the outlook for issues such as fiscal spending and regulation although some form of divided government seen as good for stocks could still shape up.
Control of Congress was still up for grabs early on Wednesday, with several pivotal races uncalled. The prospects of a Republican “red wave” had evaporated although in the House of Representatives, Republicans remained favored to win a majority.
U.S. stock indexes opened lower as uncertainty around the vote results weighed on the mood, with investors focus shifting to Thursday’s important October Consumer Price Index report. The U.S. dollar was steady.
With Democrat Joe Biden in the White House, Republicans taking the House would lead to a split government, an outcome that has been accompanied by positive long-term stock market performance in the past.
Here’s what observers are saying:
ALEC PHILLIPS, ECONOMICS RESEARCH, GOLDMAN SACHS
“While Democrats outperformed expectations and Democratic Senate control would be a surprise, the end result nevertheless appears to be divided government and the policy implications are broadly similar to what would have been expected with Republican majorities in both chambers.”
“Senate control matters much less if Republicans have won the House majority. There are two general differences between a divided Congress and a Republican Congress. First, the Senate confirms presidential nominations with a simple majority, so continued Democratic control would limit Republican influence on President Biden’s nominations over the next two years. Second, passing legislation in a divided Congress would be harder than in a Republican Congress, though in either scenario bipartisan support would be needed (as President Biden could veto in either scenario, and Republicans would lack the 2/3 vote to override) so the amount of legislative activity could be similar.”
“Under a Republican House and Democratic Senate in 2011 and 2013, debt limit uncertainty disrupted financial markets and led to substantial spending cuts. A similar scenario could play out next year, though a Democratic Senate would make it less likely that a debt limit deal would involve spending cuts of the sort enacted in 2011. A legislative response to a potential recession would also be more difficult.”
FLORIAN IELPO, PORTFOLIO MANAGER, LOMBARD ODIER ASSET MANAGEMENT
“The perspective of that inflation number overshadows everything else, inclusive of the U.S. political situation. We need lower inflation to keep our eyes off the Fed and start looking elsewhere.”
MICHAEL HEWSON, CHIEF MARKETS STRATEGIST, CMC MARKETS, LONDON
“If the Republicans can get a blocking in one of the Houses, then ultimately, that could be less inflationary, because it will mean the Democrats won’t be able to spend nearly as much money, so in terms of yields, that could be a good thing.
“It’s potentially also positive for stock markets and probably why we’ve seen a weaker dollar, but obviously, the main focus remains on tomorrow’s CPI numbers and particularly the core number.”
FIONA CINCOTTA, SENIOR MARKETS ANALYST AT CITY INDEX, LONDON.
“It does look like it’s a bit tighter than expected. The expectation is still for the Republicans to flip the House of Representatives.
“We see a gridlocked Washington as a dollar negative. Any spending measures being kept in check could bring inflation down and potentially we could see less aggressive moves from the Fed (U.S. Federal Reserve).”
STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON
“The midterms do not seem to have gone quite so well for the Republican Party as had been forecast, but even though they look like making smaller gains, it still appears that they will do well enough to take control of at least the House and that alone suggests political gridlock going forward.
“This will almost certainly be the end of the tax rises the Biden administration had been talking about imposing on U.S. corporations and the well-off. It also means the end of the loose fiscal policy Biden had been pursuing. This is particularly important, as it removes a source of stimulus from the economy and makes the job of the Fed in getting inflation back under control that little bit easier, to the extent that it may allow for a lower terminal rate.
“But looming larger now is the prospect of another battle over raising the US debt ceiling and the prospect for Government shutdowns while the Democrats and Republicans argue over it.
“For the markets, a grid-locked administration should be positive for equities, given that it makes the Fed’s task that little bit easier.”
DANNI HEWSON, FINANCIAL ANALYST, AJ BELL, LONDON:
“The fact that we didn’t see a Republican landslide as a lot of people had expected does now raise questions about whether or not the Democrats will maintain control of the Senate. You’re in a slightly different situation and it does look like the Biden Presidency has not been dealt a massive blow by these midterm elections, so the markets are in a wait-and-see mode.”
CHARU CHANANA, MARKET STRATEGIST, SAXO MARKETS, SINGAPORE
“The race seems to be closer than expected, especially for the Senate. If Democrats take the Senate, it will be a huge embarrassment for Republicans even if (they) take the House.
“U.S. index futures have turned negative, and I think (the) dollar could turn back higher if Democrats retain the Senate.”
GARRETT MELSON, PORTFOLIO STRATEGIST, NATIXIS INVESTMENT MANAGERS SOLUTIONS
“The likely result (of the election) is gridlock in some shape or form. Divided government reduces the likelihood of significant legislative changes, thereby reducing policy uncertainty – a positive for risk assets.
“Looking into mid-late 2023 we may see delayed effects of the election as the budget and debt ceiling debate come into focus. Should Republicans take one or both chambers of Congress expect a potentially contentious bout of political brinksmanship that could contribute to some market volatility in 2023 before an eventual resolution is reached.”
QUINCY KROSBY, CHIEF GLOBAL STRATEGIST AT LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA
“Some of the key races are quite close. It’s going to take some time to see who wins but it is surprising … We already have a scenario of gridlock because the Republicans are going to take the House. The market can accept gridlock. It means that many of the measures from the administration will be thwarted by the opposing part.
“That said, if the Republicans take the Senate along with the House that provides a pro-business backdrop for the market.”
RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
“Obviously we don’t have a 100% reporting in on anything yet, but it doesn’t look like anything we have seen so far has spooked markets at all.”
ASH ALANKAR, HEAD OF GLOBAL ASSET ALLOCATION AT JANUS HENDERSON INVESTORS
“On one end, the reduced likelihood of corporate and personal and capital gain tax increases, that come with a Republican win, will be a tailwind for all equities … however on the other end, the prospects of no tax increases and extension of Trump’s tax cuts all potentially are inflationary as the private sector has more disposable after tax income.
“A Republican win will in generally be positive for equities, but inflationary risk is unlikely to be mitigated nor accelerated.”
TROY GAYESKI, CHIEF MARKET STRATEGIST, FS INVESTMENTS, NEW YORK
“In the chance that both the House and Senate flip, it could lead to a miniature kind of sideways slash bear market rally, but ultimately, Fed tightening, money supply contraction and inevitable recession will dominate the changing political landscape in the U.S.
“When you think of the order of importance to markets, it’s really the Fed, the economy, the very troubling situation overseas and the midterms they’re just not terribly relevant over the next 6, 12, 18 months, because they’re really almost a non-event.
“If the Congress flips, it could be perceived as good news by investors because it means fiscal stimulus is over and that on the margin could make the Fed’s job a little bit easier to break inflation.”
JJ KINAHAN, CEO, IG NORTH AMERICA, CHICAGO
“Having a balanced ticket in terms of Republicans, if they get the House and Senate, or just the House, will help slow some of the government spending which many have seen as one of the major contributors to inflation. So that happening may help do some of Fed’s work for them, so to speak, and that’s why that would be viewed favorably by the market.”
BROOKS RITCHEY, CO-CIO, K2 ADVISORS
“If we get a split Congress, we might have to adjust our portfolios to be less defensive than we are today.”
IPEK OZKARDESKAYA, SENIOR ANALYST, SWISSQUOTE BANK
“From an investor point of view, a Republican win in both chambers is a good outcome for the stocks. And even a divided government, which we will sure get, is better for the stocks than a Democratic win.”
JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET CAPITAL, CHICAGO
“I think the markets are rallying at the prospect of gridlock.”
“Fiscal spending has created a challenge for central banks worldwide. The prospect of no legislation is a bullish inflation signal.”
