Next month’s elections are likely to follow that pattern. The Republicans currently hold a majority in both the Senate and the House, which has allowed them to pass markets-friendly legislation pertaining to corporate tax cuts and deregulation. That’s expected to change, with the Democrats odds-on favourites to regain control of the House of Representatives
Betting odds suggest the Republicans will retain control of the Senate, although the party’s narrow majority (it holds 51 of the 100 Senate seats) and Donald Trump’s sagging approval ratings mean this is no sure thing. The election results “could affect the likelihood of certain pro-growth measures”, says Merrill, such as making individual tax cuts permanent as well as “new incentives for retirement savings and research and development”.
More importantly, perhaps, Democrat gains might ratchet up political uncertainty, allowing them to open multiple investigations into Trump or to attempt to impeach him.
The stock market wants a Republican wave but expects to see two-party control of Congress
Just ending the uncertainty around the midterm elections is likely to spark a relief rally, and strategists say it could be the start of a very good time for stocks, especially if Republicans hold onto both houses of Congress on Nov. 6.
For weeks, the market has been pricing in a scenario where Republicans keep a lead in the Senate, possibly adding a few seats, but lose control of the House of Representatives to Democrats. That is the scenario that would be most neutral for stocks, according to strategists.
Morgan Stanley policy strategist Micahel Zezas said the case for divided government has become more likely, as Democrats slip in the polls. A split Congress would be mildly bullish for Treasurys, with less of a chance that more tax cuts get passed, and bearish for the dollar. For stocks, it would be neutral
Clifton said stocks are not pricing in the surge in betting odds for a Republican sweep. In early October, betting on Predict.it showed a divergence in expectations, with odds for a split congress and a full Democratic sweep falling while the odds of a Republican sweep rose. The odds of s split Congress are still 58 percent, and for a Republican sweep, 36 percent.
"Unanimously everyone believes the Democrats are going to take the House and the Republicans are going to control the Senate," said Julian Emanuel, chief equities and derivatives strategist at BTIG. "From our point of view, when we think about what is a potential surprise to the markets place...the biggest surprise to us would be if the Republicans held the House."
He said no matter who wins, stocks should bounce but with Republicans they could bounce even more.
Zezas said a Republican sweep would be neutral for stocks but bullish for phamaceuticals, REITs, telecoms and health care services. Democrats would be neutral for stocks in general but bearish for pharma, REITs, telecom and some health care services.
Reference: CNBC
Thai
Eng