U.S. stocks were sharply higher in pre-market trading after the midterm elections resulted in a divided Congress.
The Dow Jones industrial average was up more than 200 points in early-morning futures trading. U.S bond prices also rose, pushing yields lower. Stocks in Europe were also trading higher. Shares closed mix in Asia in muted trading.
Wall Street woke up to a new power split in Congress and a likely period of legislative gridlock after the Democrats regained control of the House, ending two years of Republican control of both branches of Congress under Republican President Donald Trump. The GOP retained its majority in the Senate.
The vote result, however, was widely expected by investors. The power shift on Capitol Hill isn’t viewed as a major game changer for the economy or markets, largely because the split Congress makes it unlikely that legislation that could undo parts of President Trump’s agenda — such as large tax cuts and deregulation of business — will get passed.
Investors also avoided the most-feared outcome, a so-called “blue wave,” or Democratic sweep of both chambers of Congress, which would have put the president’s economic policies under assault.
“Everything played out according to script,” Stephen Innes, head of Asia trading at Oanda, told USA TODAY. “The Trump agenda is not in serious jeopardy.”
Still, the Democrat-controlled House will likely make things tough on Trump and move to block his agenda, adds Mark Hamrick, senior economic analyst at Bankrate.com
“House Democrats will turn up the pressure on President Trump through investigations and oversight,” Hamrick said.
Legislative gridlock has historically been good for financial markets. In fact, in years with a Republican president and a Republican-controlled Senate and Democrat-run House in place — the new configuration after last night’s vote — the Standard & Poor’s 500 stock index has posted average gains of 10.8 percent, according to data from Strategas Research Partners.
“A split Congress means that gridlock is more likely, and that’s been fine for markets in the past,” says Kate Warne, investment strategist at Edward Jones.
A Democrat-controlled Congress would have been greeted less well by investors, as it would have increased concerns about the possible rollback of regulations and other Trump-driven policies, adds David Joy, chief market strategist at Ameriprise Financial.
“The outcome of the elections was not a tail risk event,” says Joy, referring to a surprise outcome similar to the Brexit vote in 2016 that rocked markets. “The markets were afraid there would be a blue wave, which would have resulted in a government that was perceived as less business friendly.”
The stock market also tends to rise once the uncertainty of the election is out of the way, allowing investors to return their focus to things like the outlook for the economy and corporate earnings, adds Joe Quinlan, chief market strategist at U.S. Trust.
“The unknown is behind us,” says Quinlan. “There were no surprise so investors can refocus on business fundamentals, which are solid and supportive of rising equity prices.”
Political gridlock, Quinlan adds, could result in less fiscal stimulus from the federal government which means there is “less risk” of the U.S. economy overheating, which could lead to less aggressive interest rate hikes from the Federal Reserve.
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