Republican victory in Congress expected to give markets a shot in the arm

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Traders work on the floor at the New York Stock Exchange in New York, Wednesday, Nov. 2, 2022. (AP Photo/Seth Wenig) Seth Wenig/AP

Republican victory in Congress expected to give markets a shot in the arm

Republicans gaining one or both chambers of Congress would likely mean a boost for the stock market, which has struggled this year.

Wall Street generally does not like change, preferring the status quo and predictability. GOP control of the House or Senate would create a red firewall to block new policy proposals from the Oval Office — ending President Joe Biden’s ability to enact spending legislation and major new policy proposals.

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The S&P 500 is down about 20% since the start of the year as the economy grapples with red-hot inflation and a possible looming recession. A Republican victory in the midterm elections would be a welcome pop for investors who have seen their portfolios shrink.

“Generally, markets like the fact that if you have a gridlocked Congress, it can’t do much,” American Enterprise Institute senior fellow Desmond Lachman told the Washington Examiner. “Biden can’t push any of his spending packages through, so it means that the budget is better controlled … and, likewise, the other side can’t cut taxes in a big way that causes deficits and pushes up inflation because Biden will veto it.”

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Indeed, even before the Tuesday midterm election results have begun to be tabulated, the stock market responded positively to polls showing that the GOP is anticipated to take control of the House and that it will be a close race in the Senate, with the Republicans having a slight edge.

The Dow Jones Industrial Average dropped more than 180 points on Tuesday afternoon, while the S&P 500 was also up slightly.

History is also a guide to how markets react following midterm elections. In the lead-up to the 2018 midterm elections, Republicans, like this year, had a GOP federal trifecta with former President Donald Trump in office. The Democrats were able to regain the House, and the S&P 500 grew by more than 2% the following day.

Morgan Stanley analysts said this week that the GOP wresting control of one or both congressional chambers would mean that stocks will likely rise, while Treasury yields will decline.

“The markets prefer a more divided government,” said Eric Beiley, the executive managing director of Steward Partners, a wealth management firm. “If the Democrats hold, I think you could see markets decline.”

Patrick Gourley, an associate professor of economics at the University of New Haven, told the Washington Examiner that another factor that would cause markets to do well would be if both parties accept the results of the midterm elections.

He said that, right now, the markets are pricing in the risk of a disputed election, so if there isn’t a dispute about which party won either chamber of Congress, the stock market would be expected to go up.

While, in the short run, markets are expected to like the newfound certainty and potential gridlock, the longer-term effects of a divided government could be less-than-ideal.

One problem is the looming debt ceiling. At some point next year, the government is projected to hit its borrowing limit unless the two parties in Congress can agree to raise it. Republicans have hinted that they would use the majority to try and force spending cuts — a situation that has the potential to send the stock market spiraling.

The Washington Examiner spoke to the three congressmen vying to lead the powerful Ways and Means Committee last month, and all three declined to rule out blocking government funding, as has been done during budget battles in the past, in order to claw back the Democrats’ recent IRS funding and hiring, although none committed to such a tactic.

“There is a whole lot of brinkmanship that can be very unsettling,” Lachman said.

Another uncertainty that the GOP holding a chamber or the entirety of Congress brings is that it could prevent the Biden administration from acting during a recession.

As the Federal Reserve continues to jack up interest rates at a historic pace — and inflation remains stubbornly high — the odds that the country will tumble into a recession have been rising. Many economists believe at least a mild recession is in store, and some worry about a more aggressive downturn.

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Biden wouldn’t be able to push forward a stimulus bill without a bipartisan effort that includes at least some Republican lawmakers. Lachman said that might be a tough challenge as the GOP is likely to be “pretty hostile” to any cooperation with the president and his allies.

Up for grabs on Tuesday are 35 of the 100 Senate seats and all 435 House seats. At 6 p.m., the first polls are set to close, although it is unclear when the result of who controls Congress will be available, as some races are expected to be very close.

© 2022 Washington Examiner

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