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Stock Market Reaction: Split Results – Modest Reaction, Democratic Sweep – Volatility to Downside, Republican Sweep – Volatility to Upside


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Late Tuesday, the U.S. mid-term elections are still a toss-up although if you believe investors bet with their money, the Republicans will retain control since the stock market is churning higher late in the trading session.

The consensus appears to show the Democrats will win the House of Representatives and the Republicans will retain control of Congress. Some analysts are saying the Democrats will take the House and Split the Senate. Still others are suggesting chances are increasing for a Republican or Democratic sweep.

Democrats Take Control of the House, Republicans Control the Senate

According to a report on CNBC.com, Goldman Sachs, Cowen, Deutsche Bank, BlackRock, Bernstein, Morgan Stanley and Fundstrat Global Advisors all believe the Democrats will win the house and the Republicans will retain control of the Senate. However, their market reaction predictions are quite different.

Goldman Sachs expects to see a modest reaction in the market. They base this on expectations of slightly weaker fiscal stimulus and growth. They also see no reason to expect major changes in trade policy. There not certain on the direction of the U.S. Dollar.

Cowen sees headline risk, which means volatility after the results are released, as the House moves to the far-left. The odds of President Trump getting impeached will increase, but it's no guarantee. This could contribute to market turmoil. However, the Trump's deregulatory agenda should remain untouched.

Deutsche Bank thinks fiscal stimulus and trade policy will be brought to the forefront. It also believes that Republican dominance is bullish. Its strategists "believe that the environment is ripe for an equity rally into year end." Democrats could attack trade policy, but overall, equities should be bullish and the Fed should continue to raise rates.

BlackRock does not see the market volatility that many are predicting. They see a low risk of rollback of Trump's tax cuts and regulatory policies. They also see the possibility of growing support for a crackdown on China's trade and intellectual property practices as well as increased risk of investigations into the president. They also see strong U.S. growth underpinning the global expansion. With the range of possible economic outcomes widening, there are some increasing downside risks.

Bernstein is optimistic. Their research shows that terms with a Republican White House and Senate see an average market gain of almost 12 percent, sparked by multiple expansion.

Fundstrat sees a rally into year-end. They point toward strong performances in the Dow and S&P 500 Index with their recommendation to overweight industrials, energy, materials, financials and communication services. They like technology too, but remain neutral on the FANG stocks. They also expect higher interest rates.

Democratic Sweep

Morgan Stanley says if the Democrats sweep, "they can't affect fiscal policy before 2020, but impacts trajectory beyond it. Reasonable to conclude fiscal contractions, less hawkish Fed, diminished worries about rising input costs. Stay long volatility, stay cautious on corporate credit."

Strategas favors infrastructure, healthcare, and consumer staples if the Democrats sweep.

Republican Sweep

Morgan Stanley see a Republican sweep as bullish. They think we can see added fiscal stimulus through extended tax cuts and higher interest rates.

Strategas thinks a Republican sweep will favor the financial and energy sectors.

Conclusion

My take on reading numerous reports is that few are expecting a sweep by either political party and few are expecting the market to crash. Volatility is expected, but that's just what markets do after elections. Expect headline risk if the results are split. Look for extended volatility if either party sweeps. Generally speaking, the volatility will be to the downside if the Democrats sweep, and to the upside if the Republicans sweep.

This article was originally posted on FX Empire

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Currencies , US Markets , Gold , Commodities
Referenced Symbols: SPX



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