After neck-and-neck election race, divided US government will be tonic for stock market

A DIVIDED American government will be a tonic for the stock market if the Republicans take control of the House of Representatives and keep the Senate deadlocked.

As of 7 pm on Wednesday (Singapore time), the Republicans were on their way towards winning control of the US House – but by smaller margins than forecast, with the Democrats gaining a Senate seat in Pennsylvania.

The Dow Jones Industrial Average added roughly 450 points on election day on Tuesday and is now about 10 per cent below all-time highs, as traders revel in the prospect of inaction from the federal government. Any hopes of tax, environmental or immigration reform will likely fall with the Democratic congress.

“Markets like gridlock. It means that not much can be done,” said Quincy Krosby, chief global strategist at brokerage LPL Financial. “Especially if the White House has what is considered to be a less-than favourable attitude regarding the business climate, it usually means they can’t push through the legislation that would be deemed negative for business.”

Every trend in modern political history ran against the Democrats. For one thing, having a party member as a resident of the White House is typically the kiss of death for mid-term congressional elections.

The last time a sitting American president woke up to good news at this stage was George W Bush back in 2002, when the Republicans won unified control of Congress at the mid-terms that year.

Add to the traditional backlash a populace that is feeling more economically disadvantaged than at the start of current President Joe Biden’s first term, and the Democrats found themselves in a “throw the bums out” landscape.

Biden has desperately tried to steer voters’ attention away from their pocketbooks, but a Gallup poll showed that the economy topped the list of important issues for voters, followed by abortion and crime.

Economists say Biden’s stimulus policies had little to do with the vicious bout of inflation laying waste to the global economy, but the voting public has not been convinced. Much Republican ink was spilled tying the president to rising prices. The “Bidenflation” label soon stuck.

The root cause of inflation in the US and worldwide is, of course, the Russia-led war in Ukraine. Here, too, Biden was penalised. His policy of clandestine support of the Ukrainian campaign is unpopular with both the military hawks who would like to see more open engagement and the non-interventionists, who would like to see the US stay out of it.

Republican legislators are unlikely to push for American boots on the grounds but will likely advocate more arms sales.

Votes continued to be tallied on Wednesday morning in the US in neck-and-neck races for the House and Senate. House Speaker Nancy Pelosi, in an interview with broadcaster PBS, said a Republican victory would spark a fight over raising the debt ceiling in 2023, which the Grand Old Party plans to use as a means to lower Social Security guarantees.

The strong showing from the Republicans could also change the dynamics in the next presidential election in 2024. Many of the incoming Republican class are avowed acolytes of former president Donald Trump. He may use their success as a springboard to launch his own campaign.

It is also possible that Biden will be persuaded by the poor Democratic showing to become the first incumbent president since Lyndon Johnson to decline a second bid for the White House.

Trump’s refusal to condemn the political violence of the January 2022 storming of the Capitol makes his reappearance on the national stage a potential flashpoint for civil unrest.

During the PBS interview, Pelosi said she hoped the trauma her family faced when her husband was attacked by an assailant with a hammer last month would not be visited on other Americans during a time of rising political violence.

The stock market will add to gains if the projections for a narrow Republican victory holds. Mike Wilson, the Morgan Stanley strategist who correctly anticipated an inflation-driven sell-off this year, is among those who expects a bounce for the stock market after the elections.

“The status quo usually means that corporations can push on with their plans and investments without the risk of everything being upended by new laws and requirements,” said Nigel Green, chief executive of deVere Group, in a note to clients.

Should either party win a super-majority, “a lot of positions would be offside”, said Matt Stucky, senior vice-president at money manager Northwestern Mutual Wealth Management.

As for inflation, it could well leave the political conversation around the same time as Biden, but not because of any causal relationship.