A stronger-than-expected showing by Democrats in the US midterm elections may force investors to rethink the split government scenario many had expected.
Democrats held onto control of the US Senate, extinguishing hopes of the “red wave” that Republicans had expected leading into the midterm elections. Republicans remain close to seizing control of the House of Representatives as officials continued counting ballots, with results expected to become apparent over the next several days.
Following last week’s midterm vote, investors had largely expected a split government, with Republicans gaining control of the House, Senate or both while Democrat Joe Biden remained in the White House. While a Democratic sweep is still seen as unlikely at this point, perceptions that such a result is within the realm of possibility could ignite worries over spending and legislation that many investors had put to rest.
Quincy Krosby, chief global strategist at LPL Financial, believes more power in Congress for Democrats may pit fiscal and monetary policy against each other, potentially delaying the Federal Reserve’s efforts to fight inflation.
“If the goal is to curtail demand, we could now have policies that underpin demand,” she said.
Returns are still flowing in for several House races, including many in liberal-leaning California. As of early Sunday, Republicans had won 211 seats and the Democrats 205, with 218 needed for a majority.
Spending is a worry for some investors because they believe it could buoy inflation and potentially force the Fed to ramp up their market-punishing monetary tightening policies. Softer-than-expected inflation data last week spurred hopes the Fed could temper its rate hikes, sparking a sharp rally in stocks and bonds.
