AP NEWS

Stocks jump in reaction to divided Congress

November 8, 2018

A day after Democrats won control of the House of Representatives, the stock market breathed a heavy sigh of relief as the Dow average vaulted more than 500 points.

The takeover of the House came up short of a high-cresting “Blue Wave” as Republicans added to their Senate majority, but it provides a check on many of President Donald Trump’s initiatives. Historically, the stock market reacts favorably to a divided government because it means few policy changes that affect business, providing investors a measure of certainty. The stock market experienced a volatile October that was fueled by fears of trade wars, rising interest rates and stymied economic growth.

The Dow Jones industrial average closed Wednesday up 545 points, or 2.1 percent, at 26,180. The Standard & Poor’s Index rose 2.1 percent to 2,813. The Nasdaq Composite Index jumped 2.6 percent to 7,570.

Stocks have risen in the 12 months following election day after every midterm since 1954, regardless of which political party won the most seats, according to Yardeni Research.

The stock market experienced a volatile October that was fueled by fears of trade wars, rising interest rates and stymied economic growth.

“We view just moving past the midterms as a positive for markets as it relieves a degree of uncertainty,” Keith Lerner of SunTrust Advisory Services said.

On average, the Standard & Poor’s 500 index rises 3.1 percent from midterm election day to year-end, Lerner said. One year after the midterms, stocks have risen 20 of 21 times with an average gain of 15.2 percent.

Lerner expects investors will now shift their focus back to fundamentals: global economic growth, corporate profits, interest rates and trade.

“I think the biggest relief is that most of the policies that have been positive for economic growth and earnings growth probably don’t get derailed,” said Robert Eschweiler, managing director of J.P. Morgan Private Bank in Houston.

Eschweiler said those policies include President Trump’s 2017 tax cuts, which are set to expire after 2025, and regulatory relief for business.

With Republicans maintaining control of the Senate, congressional gridlock could slow or dampen some Republican policy initiatives that have big implications on the U.S. economy, including a proposed second tax cut and a fix for health care.

Analysts also expect Republicans will have to back down on some initiatives as campaigning for the next election will start soon.

“The likelihood of policy gridlock will almost certainly increase, with Republican efforts to make the 2017 individual tax cuts permanent or eliminate Obamacare likely to be off the table until following the 2020 presidential and congressional elections,” said John Raines, Head of Political Risk for IHS Markit.

There are areas where Democrats and Republicans will have an easier time coming together.

“Infrastructure and Medicare reform are two areas of policymaking where the two parties share some common ground,” said Bernard Yaros, an economist at Moody’s Analytics.

The White House and Senate Democrats both recognize that America’s infrastructure — such as roads, bridges and dams — are in desperate need of investment. But funding for broad infrastructure work, which can enhance productivity and bolster the economy, will likely be stalled by negotiations between the parties on funding.

“Trump and Senate Democrats have both rolled out plans this year calling for significant increases in infrastructure spending,” Yaros said. “Were the two to come together on this issue, they would still face an uphill battle in reconciling stark differences between their plans in terms of the federal government’s contribution and how to pay for more infrastructure spending.”

Both sides appear to be fairly aligned on Medicare.

“I do think that large pharmaceutical companies are convenient targets for criticism” for both parties, said Mark Hamrick, senior economic analyst for Bankrate.

Attacking deficit spending may not be so easy.

Democrats have complained loudly about the growing deficit spending, which the nonpartisan Congressional Budget Office estimates at $782 billion for this fiscal year, an increase of $116 billion from last year’s shortfall. Analysts expect the Democratic-led Congress to push against proposals for additional tax breaks but is unlikely to do any heavy lifting when it comes to deficit spending.

“There are not a lot of people raising their hands about things they want to give up when it comes to federal spending,” Hamrick said.

Regardless of how well the divided Congress works together, the Federal Reserve will continue to be in the driver’s seat. The Fed has been gradually raising short-term interest rates to keep inflation in check with the next adjustment expected in December. The Fed is expected to raise rates at least two more times next year.

“The bottom line is that they are still very much a key factor for 2019,” Eschweiler said.

john.roper@chron.com

twitter.com/jcroper

AP RADIO
Update hourly