Will the stock market celebrate gridlock?

Tomorrow is election day and it’s looking like we’ll end up with a small victory for Democrats in the House of Representatives while the GOP hangs onto the Senate for another two years.

Here’s Bank of America Merrill Lynch on why gridlock could be a modest positive…

Our base case view of a split Congress could be supportive of equities, as markets historically do well under gridlock (nothing done, nothing undone). A Republican hold could be more near-term positive as it could suggest more pro-growth measures (e.g. further individual tax cuts or making select tax cuts permanent), but could be longer term bearish due to the stronger dollar, tighter monetary policy and widening of the deficit.

Equities: Gridlock is good

Markets generally do well under gridlock. A modest infrastructure bill might see bipartisan support, which could lift Industrials and Materials. A Republican sweep could be equally positive for the overall market as gridlock, as a coordinated Congress could move to enact pro-growth measures. These could include another round of individual tax cuts, or making select tax cuts permanent. But repeal and replace of ACA would likely be up for grabs, an overhang for Health Care. The impact here would likely be risk-on and certain sectors would be more likely to benefit. But the stronger USD expected under this scenario could hurt S&P 500 earnings, and if rampant growth results in tighter monetary policy, equities could end their bull run the way they have tended to historically at the hands of the Fed. Meanwhile, a Democratic sweep could increase the risk of congressional investigations. And while this scenario is currently not on the table, in the event of impeachment proceedings, it could be classified as an exogenous macro “shock.” Since 2010, shocks have driven a 6% peak to trough decline, but the market has generally recovered much of the initial selloff. A longer term risk of a Democratic sweep could be a potential reversal of tax reform, which has contributed double-digit earnings growth to S&P 500 companies.

The US equity market generally does well following mid-term elections both in the near and long-term. On average, S&P 500 annual returns following a midterm election have been stronger than overall annual average market returns since 1952 (Chart 3). The best consecutive three months of the mid-term year are October, November, and December. The S&P 500 has been up 86% of the time with an average return of 6.4% during 4Q of the mid-term year.

and here’s the chart:


2018 midterm election update
Bank of America Merrill Lynch – October 31st 2018

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. AVF ESL822B-T manuals commented on Jan 20

    … [Trackback]

    […] Here you can find 51544 additional Info to that Topic: thereformedbroker.com/2018/11/05/will-the-stock-market-celebrate-gridlock/ […]

  2. paito warna sgp commented on Jan 30

    … [Trackback]

    […] Read More Info here on that Topic: thereformedbroker.com/2018/11/05/will-the-stock-market-celebrate-gridlock/ […]

  3. how to watch rugby commented on Feb 02

    … [Trackback]

    […] Info on that Topic: thereformedbroker.com/2018/11/05/will-the-stock-market-celebrate-gridlock/ […]