MARKETS DON’T MIND GRIDLOCK
Major U.S. stock indexes soared Wednesday after the uncertainty of contentious midterm elections ended.
Major U.S. stock indexes soared Wednesday, with the Dow Jones industrial average gaining nearly 550 points, after the uncertainty of contentious midterm elections ended with the most widely expected result: a Democratic takeover of the House and Republicans retaining the Senate majority
The Dow’s gain of
545.29 points, or 2.1 percent, to 26,180.30 was broadly based, with health care stocks performing especially well as the threat of an Obamacare repeal became less likely. The Standard & Poor’s
500 index had a similar percentage jump while the technology-heavy Nasdaq composite was up about
2.6 percent. “Mostly it’s a big sigh of relief in that the midterm elections are behind us and a surprise didn’t happen,” said Michael Arone, chief investment strategist at asset manager State Street Global Advisors, who called the gains a “relief rally.”
A divided Congress likely means gridlock in Washington for the next two years on major policy matters. That would be just fine with businesses, which already have locked in a large corporate tax cut and sweeping relaxation of regulations.
That agenda has temporarily boosted the U.S. economy, and the election results are unlikely to change its trajectory. Although growth is projected to slow in the next two years as the fiscal stimulus fades, that’s an outcome that had been expected even if the GOP maintained control of the House.
“The business community couldn’t have imagined in (its) wildest dreams having a president as sympathetic to their cause general as President (Donald) Trump,” said Mark Hamrick, senior economic analyst at financial information website Bankrate.com.
“You would require both houses of Congress (to go Democratic) to essentially override all of that legislatively and you don’t have that,” he said.
Even though Democrats opposed the-tax cut legislation because much of it was focused on corporations and the wealthy, the party won’t be able to do a large- scale rollback of the cuts given that Republicans retained control of the Senate and Trump would veto such a bill anyway.
At a White House news conference Wednesday, Trump said he’d be open to raising tax rates on corporations and/or the wealthy in exchange for a deal with Democrats on middle-class tax cuts. Trump had floated the idea of a middle-class tax cut in the waning days of the campaign.
“If the Democrats come up with an idea for tax cuts … I will absolutely pursue something even if it means some adjustment” in the new lower rates, he said. The corporate rate was slashed to 21 percent from 35 percent, and the top individual tax rate was reduced to 37 percent from 39.6 percent.
House Democratic leader Nancy Pelosi, D-Calif., said Wednesday that her party’s new House majority would “strive for bipartisanship” and said she had talked Trump on election night about working together on building and renovating highways, bridges, airports and other infrastructure. She also said she hoped to work with him on lowering the cost of prescription drugs.
“We believe that we have a responsibility to seek common ground where we can,” she said at a Capitol Hill news conference. “Where we cannot, we must stand our ground. But we must try.”
Trump said Wednesday he was open to working on those issues – unless House Democrats try to investigate him and his administration.
“Hopefully, we can all work together next year to continue delivering for the American people, including on economic growth, infrastructure, trade, lowering the cost of prescription drugs,” he said.
Some business sectors could face tougher scrutiny as House Democrats gain the power to hold hearings and subpoena corporate executives.
Wall Street in particular could find itself in the cross-hairs as Rep. Maxine Waters, D-Calif., one of Washington’s most outspoken critics of big banks, is expected to become chairwoman of the House Financial Services Committee.
“We expect the top executives at the biggest banks will be called several times over the next two years to testify before House Financial Services,” wrote Jaret Seiberg, an analyst with brokerage and investment bank Cowen & Co., in a research note Wednesday.
“In addition, incoming House Financial Services Chairman Maxine Waters will investigate how the biggest banks interact with consumers and businesses,” he said. “We believe Wells Fargo is most exposed on this front given the never-ending controversies surrounding the bank.”
Despite the San Francisco bank’s continuing troubles shaking off its unauthorized-accounts scandal and other consumer abuses, shares of Wells Fargo were up nearly to $53.58.
For investors, the mid- term election results could be a best-case scenario.
A pre-election analysis by Bank of America Merrill Lynch investment bank showed that the annual returns of the S&P 500 are better under a divided Congress than when Republicans control the White House and Capitol Hill.
“Markets generally do well under gridlock,” said the Bank of America Merrill Lynch report. Since
1928, the S&P 500 has had an annual return of 12 percent with a Republican president and split control of Congress. That exceeds the returns when a Republican president has had either a full Republican or Democratic Congress, the report found.
Average returns in the year after a midterm election have been more than
20 percent since 1952.
Specialists on the floor of the New York Stock Exchange watch President Donald Trump’s news conference Wednesday. The results of the midterm elections came in largely as investors had expected.