Midterm results give Dow 545-point boost

If the big rally on Wall Street after the midterm elections is any guide, gridlock is good for stocks.

U.S. equities jumped sharply higher Wednesday after the midterm elections set the stage for a newly divided Congress, an outcome that eased fears about a big change in policy that could hurt corporate profitability.

The Dow Jones Industrial Average rallied more than 545 points, or 2.1 percent, to 26,180, boosting its gain for the year to 5.9 percent and leaving it just 2.4 percent shy of its October record high. The rally was broad, with the Standard & Poor’s 500 stock index rising 2.1 percent and the technology-dominated Nasdaq composite gaining 2.6 percent.

Wall Street woke up to a partisan power split in Congress and a likely period of legislative gridlock after the Democrats regained control of the House, ending two years of Republican control of both branches of Congress under Republican President Donald Trump. The GOP retained its majority in the Senate.

The vote result, however, was widely expected by investors. The new Capitol Hill alignment that will take effect in January isn’t viewed as a major game-changer for the economy or markets, largely because the split Congress makes it unlikely that legislation would undo parts of President Trump’s agenda – such as large tax cuts and deregulation of business.

Investors also avoided the mostfeared Wall Street outcome, a socalled “blue wave,” or Democratic sweep of both chambers of Congress. That could have put the president’s economic policies under assault and boosted the odds of a Democratic House pushing for Trump’s impeachment.

“Everything played out according to script,” Stephen Innes, head of Asia trading at Oanda, told USA TODAY. “The Trump agenda is not in serious jeopardy.”

Still, the House will likely make things tough on Trump and move to block his agenda, adds Mark Hamrick, senior economic analyst at Bankrate.com

“House Democrats will turn up the pressure on President Trump through investigations and oversight,” Hamrick said.

Legislative gridlock has historically been good for financial markets. In fact, in years with a Republican president and a Republican-controlled Senate and Democrat-run House in place, the Standard & Poor’s 500 stock index has posted average gains of 10.8 percent, according to data from Strategas Research Partners.

“A split Congress means that gridlock is more likely, and that’s been fine for markets in the past,” says Kate Warne, investment strategist at Edward Jones.

In the past, after the uncertainty around the midterm elections has been eliminated after the vote, stocks have performed well, posting higher returns a year after every midterm election since World War II.