Ramifications of Midterm Election on Wall Street

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With the much-anticipated midterm elections just a few short weeks away, investors are working to understand how the results might affect the stock market.

The most likely scenario is a status quo situation. Most political pundits and pollsters are predicting that the Democrats will take control of the House of Representatives while the Republicans will hold their advantage in the Senate. Should this play out as expected, there will be a divided Congress. As is usually the situation in these types of political scenarios, gridlock in Washington will lead to not a lot of significant policy change. A stagnant policy picture will most likely keep current fiscal and trade regulations headed down the same path. This would translate into limited changes in the markets until the next presidential election in 2020.

Investment firm Barclays is echoing this sentiment of likely gridlock. Last week, the company warned that the markets would suffer if the Democrats unexpectedly took control of the Senate. A Congress controlled by Democrats on both sides would cause concern among investors worried about the possible rollbacks of tax cuts and other Republican policies favorable to big business. Investor confidence would also be hurt by increasing calls for impeachment should the Democrats be in the position to push that through Congress.

Morgan Stanley warns that Democratic dominance at the polls could be bad news for the pharmaceutical industry. Investors have concerns that Democrats will continue their crackdown on escalating drug prices. However, the investment firm believes that a Democratic sweep of both sides of Congress would not affect the market overall in meaningful ways.

In the unlikely event that Republicans remain in control of both the House and Senate, the confidence of investors will be buoyed as they look forward to more possible tax cuts. However, some experts believe that because of the rising deficit, additional tax cuts are highly unlikely. More money added to the already burgeoning deficit would cause the Federal Reserve to increase interest rates.

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