What A Split Congress Means For The Stock Market

Now that the votes have been tallied from the midterm elections, investors are shifting their attention to what the fallout from the midterms will be for the stock market. The early returns on a divided Congress are positive, with the SPDR S&P 500 ETF Trust SPY trading higher by 2 percent Wednesday.

Here’s a rundown of how analysts see a divided Congress impacting the stock market.

Questions Remain

Jefferies analyst Sean Darby said the market got the outcome it was hoping for.

“The concern that an emboldened Republican party retaining both houses might have embraced another round of tax cuts, thereby increasing the deficit, has receded,” Darby wrote. While Darby said he has questions about how long the bull market can survive in a rising-rate environment, he said there’s no imminent signs of danger for the stock market.

“Don’t short the S&P 500,” he said.

Wells Fargo analyst David Maris said the positive knee-jerk market reaction to the election is not surprising, but the next two years could be tumultuous for investors.

“We think 2019 – 2020 could be a very healthcare focused Congress with intensifying uncertainty during the next Presidential election cycle,” Maris wrote.

He said investors shouldn’t be surprised to see the focus of Congress shift from health care to drug costs in particular, a seemingly bipartisan issue.

Don’t Ignore Washington

Height Capital Markets said there were only a small number of surprises on Tuesday, with toss-up elections being split roughly 50-50.

“Despite the fact the 116th Congress will be divided with Democrats controlling the House and Republicans controlling the Senate, it will not be the case that investors can ignore Washington. The two parties still must work together on policies important to lawmakers and the Trump administration,” Height wrote.

LPL Research chief investment strategist John Lynch said a divided Congress likely takes political extremes off the table, and history shows the coming months will likely be good for the market.

“Based on history, Republican presidents and a split Congress have been one of the best combinations for stocks, which have gained 15.7% on average in this scenario based on the S&P 500,” Lynch wrote. He said the S&P 500 has not produced a negative overall return in the 12 months following a midterm election since 1946.

Tech Sector Implications

DataTrek Research co-founder Nicholas Colas said the shift in power in the House may have a disproportionately larger impact on some of the largest tech companies. Democrats now gain control of the committees that have been grilling big tech companies about data security, and their attention will likely now shift to attacking the White House instead.

“If gridlock in Washington is good for stocks, it may be absolutely wonderful for Tech,” Colas wrote. “All the industry has to do is not screw up too badly, and they do seem intent on beating that low bar just now.”

The Technology Select Sector SPDR Fund XLK traded higher by 2.7 percent Wednesday.

Related Links:

Midterms And The Stock Market: Potential Winners, Losers From The Coming Election

Tariffs, Drug Prices, Legislative Gridlock: What Economists Are Watching Following The Midterm Election