The combination of
a Republican President and a split Congress have produced an average return of
15.7% on the S&P 500 in the 12 months following every mid-term election
since 1950. These strong returns suggest that investors prefer a gridlock, a
situation when different political parties control the two legislative houses.
While such anomalies are difficult to explain, investors may find that a
gridlock produces more predictable political outcomes to model and value
equities against. In the case of a gridlock, Democrats cannot roll back
recent tax cuts, neither they can tighten the Dodd-Frank banking rules. It may
just mean that Trump will face more difficulties in passing new laws.
However, in the
current tense environment it seems Wall Street will prefer Republicans to
retain both legislative houses. That’s simply because a new tax cut will be
expected to take place, further deregulation, and probably additional fiscal
stimulus. While such measures are not necessarily good for the longer run as
deficit and debt may get out of control, many investors will take advantage of
these policies in the shorter run. Given that the polling industry got it wrong
in 2016 and Trump became President, history may repeat itself this time again.
It would be more surprising if
Democrats managed to win both houses. This will be a nightmare for Wall Street,
as the Trump impeachment threat will become more real, but still, this would
require help from some Republicans. Even if he doesn’t get impeached, the
President will no longer have the power to pass bills and probably lead to
pulling back some of his deregulatory actions, which definitely is not liked by
corporate America.
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