The midterm elections are over and the results are still coming in, projecting a divided legislature in Washington: A Republican majority in the House of Representatives and a Democratic majority in the Senate.
With the Republican Party likely in control of the House of Representatives (results for the Senate to follow), global trade credit insurer Allianz Trade North America expects that Washington will not advance any major economic and fiscal legislation in the next two years.
This is usually good for the nation’s businesses, as economic and tax laws increase the cost of doing business.
“Divided government leads to gridlock,” said Aaron Rafferty, CEO of BattlePacs, in an email to the International Business Times. “The gridlock slows policy-making, and slower policy-making means more near-term certainty for business.”
Financial markets usually like this situation.
“Historically, we see some of the best returns (above 13%) with a Democratic president and a Democratic congress,” Rafferty added. “In contrast, a unified government is traditionally worse for markets and it would be business as usual as we have seen over the past two years.”
But that’s something markets may have already priced in, according to Konrad Petraitis, an analyst at London-based Sibylline, a global risk analysis firm.
“Since Clinton, there’s been a downward trend in legislation introduced or enacted,” he told IBT.
Petraitis believes a Republican-dominated House will likely invite scrutiny of big corporations, especially those that have supported what are seen as left-wing causes.
“You expect CEOs to be dragged into committees to explain their political views in televised hearings,” he explained.
Regarding macroeconomic policy, Petraitis does not expect a significant shift away from fiscal populism. Both parties have mostly abandoned the mantra of fiscal conservatism, although the GOP still has enough bases that give the GOP some power.
“We do not expect any tangible tightening of the belt in the near future,” he added. “With suggestions that a recession may be in the offing, the GOP may find itself in a position to work with Democrats to add further stimulus to the economy just before the 2024 election.”
Rafferty expects to see much less spending on green initiatives and more theoretical technologies with a Republican-controlled House. Additionally, he sees “some weight shifting away from the financial sector in favor of more heavyweight giants like Blackrock and JP Morgan and away from more consumer-related services like Robinhood.”
But Robert R. Johnson, a professor at Creighton University’s Heider College of Business, believes that with control of the Senate likely to hinge on the Georgia Senate race, markets are in for uncertain times, which could lead to traders and investors on a wild ride.
In addition, Johnson argues that the intermediate terms were just a momentary diversion for markets from the Fed’s interest rate policy.
“And, recent lower-than-expected inflation and employment numbers give investors hope that the Fed will be able to hold off on rate hikes sooner than expected,” he added.