GRIDLOCK: Traditional anti-incumbent sentiment (see chart), President’s low approval rating, and inflation concern drove Democrat losses in the US midterm elections. This gridlocks Congress, but the ‘Republican tsunami’ did not happen. This is a short-term positive. Markets historically reward less uncertainty and split government. But it has potential for medium term pain, from uncertainty over the debt ceiling to recession spending. A more gridlocked US may also be a loss for Europe, with less leadership on key issues, from trade to the environment, and a further unwelcome de-globalisation push. The new Congress sits from January 3rd, 2023.
SHORT TERM: This is positive. 1) With elections over, the markets have one less thing to worry about. 2) Investors traditionally don’t mind gridlock and markets often perform well. Whilst not all results are in, many down ballot initiatives on cannabis liberalization, sports betting, and crypto made progress. Republican gains were less than forecast, but traditionally supported sectors from defense to energy, and are likely to ease legislative pressures on healthcare and ‘big tech’.
MEDIUM TERM: Longer term the market outlook is less positive. 1) Republicans seem set on leveraging the coming 2023 Federal debt ceiling to force Democrats to curb spending. This will drive volatility and miss-step risks. 2) Any downside recession risks are likely to be met with Republican fiscal spending foot dragging, potentially unnerving markets if the downturn is deep. This would also put even more focus on the Fed. 3) Republican attempts to impeach President Biden could generate market volatility and take away energy from other congressional business.
All data, figures & charts are valid as of 08/11/2022