Gridlock Is a ‘Perfectly Acceptable Scenario’ for Markets

 
 

What You Need to Know

  • While unlikely, Democrats’ retention of the House would stun Wall Street, Greg Valliere says.
  • Secure Act 2.0 is likely to pass no matter who wins the House, says Jeff Bush of The Washington Update.

While a GOP sweep failed to materialize during the midterms, “a stunner” in Washington and on Wall Street would be Democrats’ retention of the House, “which is doubtful but not totally out of the question as recounts continue this week,” Greg Valliere, chief U.S. strategist of AGF Investments, said Monday morning in his Capitol Insights newsletter.

The likelihood of gridlock, “a perfectly acceptable scenario for the financial markets — assumes that the narrow majorities in both houses will spin their wheels for the next two years,” Valliere said.

Valliere opined that gridlock “will dominate, with bitter battles over spending that will resume soon.”

Between now and Jan. 3, when the next Congress convenes, “a lame-duck session will heat up over spending; Biden and the Democrats are determined to raise the debt ceiling and agree on a massive budget package before the current deal expires in mid-December,” Valliere wrote.

Another lame-duck item: Secure Act 2.0. “It’s the capstone project for two retiring senators, a Republican and a Democrat,” Jeff Bush of The Washington Update added in an email. “This is why we believe it has a better-than-equal chance of passing. It’s strongly supported by both parties and will likely get appended to one of the must-pass pieces of legislation.”

As to the midterms, “Regardless of the final count, it’s clear it was not a good night for the GOP. They were challenged by candidate quality issues in statewide elections” for offices like senator, governor and secretary of state, Bush said. “Where they had a better night was in gerrymandered House districts.”

While it’s more likely the GOP will gain the majority of the House, Bush continued, “it’s clear their majority will be small. A small majority can challenge the speaker to keep their caucus in line and move their agenda forward. Assuming Kevin McCarthy is elected speaker of the House, the caucus may prove unmanageable.”

Investors, Bush continued, “generally prefer an underachieving Congress vs. an activist one (single-party control). So, markets would prefer a GOP House at this point.”

Raymond James analysts agreed Monday morning that control of the House remains in doubt.

“In the race to 218 votes for a House majority, Republicans currently lead 212-204, with 19 uncalled races,” the analysts wrote in their Monday morning Washington Policy newsletter. “Despite earlier projections, control of the House remains in play. While Republicans look slightly favored, Democrats have a path to retain their majority, but would need to outperform in final vote counts (especially in CA).”

President Joe Biden, meanwhile, “now has a Senate majority that doesn’t depend on Sen. Joe Manchin, and Biden will prevail with dozens of judicial appointments, which require a simple majority,” Valliere opined. “Biden would like to press ahead with more spending and tax hikes, but that would be blocked in the House — assuming the Republicans maintain control.”