What Does a Divided US Congress Mean for the Economy and Markets?
Democrats took the House of Representative. Republicans held the Senate. What should investors expect from the US midterm election outcome? In the way of policy, not much. But the new political landscape may be good for markets.
The US midterm election result was in line with preelection polls and isn’t likely to change the outlook for the economy. With Congress split between the two major political parties, we think it’s unlikely that major new legislation will find its way to President Donald Trump’s desk before the 2020 presidential election.
For example, Democratic control of the House effectively dashes any chance of a second round of tax cuts—a scenario that could temper the upside potential for US equities. But with Republicans holding the Senate and the presidency, there’s little chance that Congress will be able to roll back recent changes and raise tax rates, either.
Democrats may decide to promote infrastructure spending, an initiative that Trump once also cited as a priority, but it’s not clear that Democrats and Trump will be able to work together. It’s also uncertain there will be bipartisan appetite for another burst of fiscal stimulus so soon after a 2018 tax reform package that’s estimated to add some $1.5 trillion to the budget deficit by 2027.
The “Gridlock Is Good” Scenario
But with the US economy doing well, the election results may be the best possible outcomes for financial markets. Historically, gridlock has been good for stocks. Since 1928, the S&P 500 Index has delivered average annual returns in the double digits during years when Democrats and Republicans shared control of Congress.