- The longest night belonged to the pollsters and pundits, whose predictions for a “red wave” did not come to fruition. Markets, too, are now reckoning with an unanticipated outcome–uncertainty–which contributed to the day-after equity market selloff.
- Looking at historical relationships between elections and market outcomes is flawed, as outcomes are often specific to each period. Generalization is thus difficult.
- Markets generally like the prospect of divided government because gridlock prevents extreme policies. However, investors may find that legislative gridlock will reduce policy flexibility when they may need it, specifically if the Federal Reserve (Fed) is the only one tasked with bringing the economy out of recession a year or so from now.
- Gridlock could also bring back the specter of using the debt ceiling as a political tool. It has happened twice before, and it could happen again.
- At the sector level, divided government will ease regulatory, tax and other policy threats to the energy and pharmaceutical sectors. It may also take some wind out of the sails of renewables or infrastructure, though existing legislation that underpins those sectors is unlikely to be unwound.
The midterm elections matter this time
Political strategists, pundits and your barstool mates probably agree on one thing—the 2022 midterm elections were the most consequential in living memory. The 2022 polls confronted voters with “the future of democracy,” abortion access, generational highs in inflation, falling real incomes, rising crime rates, an epidemic of mass shootings, and degrees of lying and misinformation unparalleled in postwar US history. All of that took place in the echo chambers of social media and what passes for “news” on cable television that amplified partisanship and quashed reasoned discussion in ways never before seen in US history. Given all of this, one of the biggest surprises is a small shift in the House of Representatives’ majority for the Republicans, rather than a clear mandate from the voters.