Investors had anticipated a divided government following last week’s midterm elections in the United States. If Democrats perform better than predicted, markets may reconsider the split government scenario.
Democrats gaining more clout in Congress may pit fiscal and monetary policy against one another, potentially delaying the Federal Reserve’s attempts to combat inflation. A divided government might hamper Democrats’ efforts to pass multiple substantial budget initiatives. Some fear that this will drive the Fed to increase its market-punishing monetary tightening measures.
Stocks have historically performed better in a divided government when a Democrat is in the White House. In a divided Congress led by a Democratic president, the S&P 500 has returned 14%.