A day after the 2022 midterm elections, control of the US Senate and House of Representatives remains up in the air. So far, markets aren’t loving the uncertainty.
All three major indexes lost close to 2% Wednesday, with the Dow dropping nearly 650 points.
Stocks had gained ground each of the last three sessions, and many experts forecast Republicans to win back control of both chambers of Congress. That hasn’t happened.
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Other than Florida, which can officially no longer be called a swing state after Gov. Ron DeSantis and Sen. Marco Rubio cruised to double-digit wins, 2022 was a soundly disappointing result for Republicans in a midterm year.
“Election results are still uncertain, but the red wave that models, investors, and betting markets anticipated did not materialize,” 22V Research president Dennis DeBusschere wrote in a Wednesday note. “Near-term, that will add to already elevated volatility.”
As of Wednesday afternoon, both parties have won or are favored to win 49 Senate seats, with two tossups — Georgia and Nevada — each leaning very slightly in Dems' favor, according to The New York Times. Depending on whether Republican Adam Laxalt defeats incumbent Democrat Catherine Cortez Masto, that uncertainty could linger for a while, as Georgia’s race appears to be headed for a December 6 runoff.
In the House, Republicans are favored to pick up nine seats by NBC News, which would give the GOP a narrow majority. That has big implications for Rep. Kevin McCarthy, who risks having a very slim margin for disagreement in his caucus, assuming he would have the votes to become speaker again at all.
One area to watch is the debt ceiling, which the US is at risk of hitting during the current quarter. If Republicans gain control of either chamber, some lawmakers have argued for using the debt ceiling as a cudgel against Democrats as they did in 2011, according to media reports. If the debt ceiling isn't raised, the US could theoretically default on its debt.
Regardless of how the dust settles, DeBusschere believes cyclical stocks will fare better than defensive ones.
“Ultimately this backdrop favors cyclicals over defensives no matter who wins,” he said. “Defensive valuations are exceptionally high relative to cyclicals, defensives cash return yields are narrowing relative to risk-free rates, and earnings sentiment for defensive groups is deteriorating further while cyclicals are stabilizing.”
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
Follow him on Twitter @andrew_kessel