Political elections and financial tumult have been intertwined ever since 2016, when the unexpected Brexit vote and President Trump’s win caught investors off guard, sending shock waves through markets.

In Tuesday’s midterm elections, however, most Wall Street analysts aren’t expecting market upheaval. The reason: Even if the vote results in a power shift in Congress and a return to divided government, it’s unlikely to bring any near-term policy changes that will undue Trump’s economic agenda or the passage of laws that will spook investors.

Wall Street is already gearing up for the possibility that the Democrats will take back the House while the Republicans keep power in the Senate. This base case, investors say, would result in legislative gridlock, but not upset the status quo.

In short, a split Congress would put the breaks on legislative activity in the coming year.

“People look at a divided Congress as not necessarily a bad thing,” says JJ Kinahan, chief market strategist at TD Ameritrade, a discount brokerage based in Omaha, Nebraska. 

Still, the market reaction could be more violent under two scenarios: if the Democrats can engineer an election sweep and grab power back in both chambers of Congress, or the Trump-led GOP retains control of both the House and Senate.

“Surprise outcomes can obviously move markets, but they are not anticipated outcomes,” says Larry Hatheway, chief economist at GAM Investments in Zurich, Switzerland.

Stocks strong after midterms

Wall Street will gain a degree of certainty regardless of the vote outcome, and that clarity has historically been bullish for stocks. Not only has the Standard & Poor’s 500 stock index been higher one year after every midterm election since 1946, the fourth quarter of the midterm election year and the first two quarters of the following year have historically been the most bullish nine months in the four-year presidential cycle, according to data from LPL Financial.

A split Congress won’t mean the undoing of the president’s big moves so far, such as a massive tax cut passed in late 2017, analysts say. Nor will it affect Trump’s rollback of business regulations, as those were decided by executive action rather than new laws passed by Congress. There’s also a chance, although there’s no guarantee, that both parties will team up to get an infrastructure bill passed. A split Congress, however, will doom Trump’s hopes for additional tax cuts.

History says a scenario of Trump in the White House and a split Congress will be a bullish combination. Stocks have performed best with a Democratic president and a Republican-controlled Congress (posting average gains of 18.3 percent from 1950 through 2017), followed closely by a 15.7 percent gain with a Republican president and a split Congress, LPL Financial data show.

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Wildcards

The most negative outcome for markets would be if the Democrats regain total control of Congress. Under that scenario, Trump’s agenda would face an aggressive pushback, his plan for additional tax cuts would be blocked, and he would likely face Congressional investigations into things like Russian interference in the 2016 elections and his tax cuts that Democrats say favor big corporations and the rich. 

The specter of a move to impeach the president will also increase.

“While (a Democratic sweep is) unlikely, the uncertainty would likely hit stock markets hard,” Alicia Levine, chief market strategist at BNY Mellon Investment Management, said in an e-mail.

In the event the Democrats take back Congress, pharmaceutical stocks could come under pressure if the party renews its push for lower prices for prescription drugs, according to an analysis by Morgan Stanley, a Wall Street bank. Shares of banks could also feel pain if the Democrats attempt to reverse the wave of deregulation of financial companies under Trump.

Budget negotiations with Trump are also likely to intensify as Democrats look to push back on spiraling deficits due to unfunded tax cuts. On the plus side, investors may welcome a Democratic “pushback on protectionism,” which could help de-escalate the president’s trade fight with China. 

Still, a wholesale unraveling of Trump’s tax cuts or other parts of his agenda of the past two years are unlikely, as it “would likely face the veto pen of the president,” Michael Feroli, an economist at J.P. Morgan said in a report.

If the GOP keeps their power in the Senate and House, for example, it would validate Trump’s economic policies and likely give stocks a lift, although there’s a possible downside if the president uses his broad mandate to push China even harder on trade, causing a full-blown trade war, warns Hatheway of GAM Investments. 

“Trump might feel emboldened to do things that would prove risky for investors,” says Hatheway. “That would be unambiguously bad for the stock market.”

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