Market bets: Divided Washington means fewer policy shocks

Over the past two years, the Trump administration's policy shifts without Republican opposition in Congress caused significant global market fluctuations. However, as the results of the historic Democratic sweep in the US midterm elections were digested on Wednesday, markets rallied. The reason: a belief that gridlock in Washington would limit some worst-case outcomes, including tensions in the Iran war.

At the same time, concerns lingered about the impact of AI infrastructure buildout on economic growth and corporate profits.

Mark Hackett, Nationwide's chief market strategist, noted that "gridlock is the market's friend." He explained that with limited chances for passing any major legislation, the environment for investors becomes more predictable. Markets had been uneasy for weeks, speculating on the potential impact of the election on fiscal outlook, AI regulation, and the Iran war. But now, investors treated the results as an opportunity to take on additional risk.

The market response was immediate, with global stocks rising, including all three major Wall Street indexes. Treasuries also rose, anticipating that divided government would curb government spending and possibly slow down rate hikes. In the long term, the results could influence foreign policy as well. After the election, US Vice President JD Vance distanced himself from President Donald Trump's decision to go to war with Iran, questioning its validity and blaming it for the Republican's electoral defeat.

This could lead to a de-escalation in tensions, according to Shawn Snyder, an economic strategist at Potomac Fund Management.

The shifting political landscape may have varying effects on different industries. Managed-care organizations and hospitals could benefit from bipartisan support for extending ACA subsidies. However, sectors relying on deregulation or policy tailwinds, such as financials, defense, and crypto, might face a less favorable backdrop. Angelo Kourkafas, a senior strategist at Edward Jones, cautioned against making aggressive sector bets based on election outcomes.

Fear of AI sector growth being hampered by regulatory scrutiny weighed on investors before the election. Opinion polls indicated growing opposition to data center construction and AI, leading to expectations of increased scrutiny from a Democratic-controlled Congress. Nevertheless, the immediate market reaction was not as concerning as initially feared, with some sectors, like hyperscalers (Amazon.com, Meta Platforms, and Alphabet) and chip stocks, benefiting from the market's perception of more rational government spending.