November 7, 2018

Stocks jump because investors like divided government

Wall Street likes divided government, and investors got just what they were hoping for.

US stock futures moved higher in early trading Wednesday following midterm election results that gave Democrats control of the House but increased Republicans' control over the Senate.

Split control of government has traditionally been good for stocks, said David Rubenstein, co-founder of the Carlyle Group, speaking at the Bloomberg New Economy Forum in Singapore.

"We shouldn't automatically assume the economy is going to go south just because the houses are controlled by different parties," he said. "When you have houses controlled by different parties they actually have to compromise a bit if they're going to get anything done, and this tends to sometimes be positive."

Some analysts speculated that investment in infrastructure, such as roads and airports construction, could be one area in which the Trump administration could find common ground with Democratic leadership in the house. That could boost economic activity.

Other experts said the biggest relief for stocks is just knowing where things stand.

"The bottom line is the market is relieved. The unknown is now the known," said Peter Cardillo, chief market economist at Spartan Capital Securities.

Some investors might have been worried that an overwhelming Democratic victory that allowed them to capture the Senate could have pointed to trouble for Republicans two years down the road in the 2020 election. Now that fear has been removed from the market.

"The poll this time basically got things right," said David Joy, chief market strategist for Ameriprise. "We've removed one element of uncertainty."

But the relief rally could be short lived, said Art Hogan, chief market strategist for B. Riley FBR, as investors turn back to the issues that were headwinds for stocks ahead of the election, including looming trade disputes with China and the risk of rising interest rates. Investors shouldn't count on stocks continuing to rise for a year as they have have after the last 18 midterm elections.

"It'll be interesting to see if this the norm and not the exception," he said. "The caveat for all of this is that we haven't had a trade war with China following the 18 midterms before this."

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