Editor’s note: This post was originally published Nov. 6, and was updated to include initial reaction from markets on Nov. 7.
In a widely-expected outcome1, U.S. midterm elections concluded with the Democrats gaining a majority in the House of Representatives, while Republicans maintained control of the Senate.
The initial reaction from markets has been largely positive, with the Dow Jones Industrial Average advancing roughly 180 points, the S&P 500® Index climbing approximately 1% and the MSCI All Country World Index gaining 0.8%, as of 7:30 a.m. Pacific time on Nov. 7. The UK’s FTSE 100 was also up about 1%. In Japan, the Nikkei 225 Index was off just slightly—down 0.3% from its Nov. 6 close.
Why the mostly positive reaction? As we discussed last month, the top pro-growth items of the Trump administration—fiscal stimulus, February’s budget agreement and a spate of regulatory reform measures—have already been signed into law. The bar to unwind any of these measures is now officially un-achievable: a two-thirds Democratic majority in both the House and Senate would have been needed to pass new legislation doing away with any or all of this (in order to survive a near-certain veto from President Trump).
Secondly, markets dislike uncertainty—and the outcome of yesterday’s elections was very much in line with most projections. In other words, certainty ruled the day. Had the unlikelier scenario of a Democratic takeover of both the House and the Senate won out, we think markets likely would have declined in more significant fashion in the days ahead.
However, this is not to say that a change in the ruling makeup of Congress—Democrats will now control the House for the first time in eight years—won’t cause volatility in markets going forward. We believe that there are now three second-order considerations at play—policies or events that investors are likely to pay careful attention to now that the House has changed hands. Depending on the outcome of each, some additional market noise is possible.
