Democrats Take Congress and the Dow Jumps 1,000 Points. Why Markets Like Gridlock

Democrats won control of both the House and the Senate in Tuesday’s midterm elections, according to Associated Press projections, and flipped governorships in Texas, Ohio and Georgia. President Trump said he would accept the results and work with the new Congress.

Markets took a few hours to decide what that meant. As results came in overnight, stock futures fell between 1% and 2.5%, and Nasdaq-100 futures touched their lowest level since July 30. By morning they had reversed. Just after Wednesday’s open, the Dow was up about 1,000 points, or 2%, and the S&P 500 and Nasdaq Composite were each up about 1.3%.

Why a sweep produced a rally

The usual explanation is gridlock. With Democrats controlling Congress and a Republican in the White House, very little new legislation is likely to pass without compromise. Investors have historically preferred that to one party holding all the levers. “Markets like gridlock,” said Andrew Slimmon of Morgan Stanley Investment Management. “They don’t like a party with too much power.”

There are limits on both sides. Democrats don’t have the 60 Senate votes needed to overcome a filibuster on most bills, and the president can veto legislation. Deutsche Bank’s George Saravelos argued that a large Democratic majority, combined with Trump’s stated willingness to work with the other side, should act as a brake on extreme policy outcomes and lower the risk premium on US assets.

Another reason for relief is simply that the vote is over. Edward Jones strategist Angelo Kourkafas called the results “a clearing event removing some uncertainty.” Markets tend to fall when the range of possible outcomes is wide, and rise once it narrows, almost regardless of which way it narrows.

Who won and who lost

Sector moves showed what investors expect to change:

• Health insurers and hospitals rose. Molina and Centene gained about 5% to 6%, and HCA about 7%. A Democratic Congress is expected to resist cuts to Medicaid and subsidized insurance, which make up much of these companies’ revenue.
• Solar and clean energy jumped. The Invesco Solar ETF rose about 9% early, and First Solar about 8%. Investors expect more support for renewable energy, or at least fewer rollbacks.
• Banks rose. Bank of America gained more than 2%.
• Defence contractors and private prison operators fell, on expectations of tighter budgets and changes in immigration enforcement.
• Data-centre stocks fell. This was the most important move of the night, and it came from state elections rather than Congress. We look at it in detail in a separate article.
• Trump Media dropped more than 7%, as traders unwound positions tied to the president’s political fortunes.

Bonds and the dollar

Treasury yields fell slightly, with the 10-year yield moving to around 4.9% to 4.93%. A Congress less likely to approve large tax cuts or new spending means less government borrowing, which is good for bond prices. The dollar slipped, and gold jumped back above $4,000.

What changes, and when

The new Congress takes office in January. Until then, the current one remains in charge. After that, the practical effects are likely to show up in:

• Budget fights. Spending bills and the debt limit require Congress, and divided government has often meant deadlines and shutdown threats. Those episodes tend to cause brief volatility rather than lasting damage.
• Oversight. Congressional committees can investigate administration policies, including trade and energy, though they can’t easily reverse them.
• Trade. Most recent tariffs, including those on Canada, were imposed under presidential authority. A Democratic Congress may push back, but it would struggle to overturn them against a veto. Canadian exporters shouldn’t expect quick relief.

The bigger picture

The “markets like gridlock” pattern is real, but it’s a tendency, not a law. Stock returns over the next two years will depend much more on earnings, interest rates and the war with Iran than on who chairs which committee. As we noted before the vote, elections tend to move particular sectors more than the market as a whole, and Wednesday’s open bore that out.