Congress divided to thwart Biden’s agenda: what will it mean for markets? – Asset Management
Capitol Hill is on the verge of a legislative deadlock as Democrats denied Republicans their hoped-for sweep. But what about the markets?
Our previous analysis shows that this result should be favorable for risky assets. U.S. stocks saw average annual gains of 12.9% when Congress was split, compared with a more modest 6.7% increase when a Democratic president controlled both chambers.
But as all investors know, past performance is not indicative of future returns. Risks include the possibility of a stalemate on the debt ceiling next year. In 2011, a similar showdown wiped out nearly 20% of the S&P 500.
Above all, attention will now turn to the 2024 presidential election. While Biden has said his “intention is to run again,” he faces an uphill battle for a second term. Threatened by low approval ratings before his 80se birthday this month, midterm polls show two-thirds of voters do not want him to seek a second term. And so, despite his incumbent advantage, Betfair’s odds imply a mere 20% chance of him winning the next presidential election.
On the Republican side, Donald Trump’s third bid for the White House has been rocked by numerous underperforming midterm candidates he backed. And he could face fierce competition for the GOP nomination from Ron DeSantis, the bookmakers’ favorite to be the next president, having just been re-elected governor of Florida by a landslide 19-point victory. However, a bitter confrontation between the two could create a deep rift in the party that helps Democrats.
Backdrop for a surprising mid-term result
The odds were stacked against Democrats heading into the midterms. One of the strictest rules in American politics is that the president’s party does poorly in what is considered a “referendum on the occupant of the White House”. And with President Joe Biden suffering from an abysmal approval rating — coming amid the highest inflation in a generation — Republicans seemed well positioned to unseat both the House of Representatives and the Senate.
But the predictions of a “red wave” turned out to be far from the truth. While a number of races have yet to be called, NBC News predicts Democrats have limited House losses to eight net seats, but enough to give Republicans a slim three-seat majority. While in the Senate, they managed to keep their tiny margin and could even leave with an additional seat.
So where did it go wrong for the Grand Old Party (GOP) and what might the implications be?
Chamber: GOP set for narrow majority
The House’s 435 seats are contested in midterm elections, making it susceptible to national swings in sentiment. The top concern for Americans this year has been inflation, with three-quarters of voters saying it has caused them severe or moderate hardship. But that was closely followed by abortion rights after the conservative-leaning Supreme Court struck down Roe v. Wade.
This proved crucial given the partisan divide on the issue between the two parties. Exit polls show 61% of voters were unhappy with the decision, with 7 in 10 backing a Democratic House candidate. It also didn’t help that the GOP fielded a number of extreme candidates aligned with former President Donald Trump, who were shunned by moderate swing voters.
But while Republicans have fared poorly nationally, they have done well in the deep blue state of New York. Redistricting played a part, with the once-a-decade process favoring them. Just like their message of law and order amid rising crime rates in the state. Additionally, the long-codified abortion rights in New York meant that civil liberties concerns did not play as much of a role as in countries like Michigan and Kentucky. In total, this resulted in a net gain of four seats in the state.
Senate: Democrats keep control
With the Senate evenly split 50-50, the Republicans only needed one seat to gain control. But unlike the Chamber, only a third of the Chamber was up for grabs. And with the majority of them solidly red or blue, the contest eventually came down to three close races; Georgia, Nevada and Pennsylvania. Once again, the right to abortion and the quality of the candidates made all the difference here.
In Nevada, incumbent Catherine Cortez Masto fended off her election-denying GOP challenger. While the pro-choice vote helped John Fetterman land a seat for the Democrats in Pennsylvania, despite a stroke that sidelined him on the campaign trail. And in Georgia, Senator Raphael Warnock edged out his outrageous Republican rival by 38,000 votes. However, he was just short of 50% of the vote, requiring a second round on December 6.
Historically, these have favored Republicans because declining turnout disproportionately affects Democrats. But Warnock avoided that pitfall two years ago, in part because of Trump’s false allegations of voter fraud. And this year, he will be helped by the fact that Senate control is not at stake. That could see GOP sympathizers sit on the sidelines or offer only muted support, especially given the Walker’s many controversies.