November 2022 | We argue that part of reason for the fairly muted response by markets is due to the expectation that a Republican takeover of the House would lead to a divided government. Our analysis has shown that under this scenario, the S&P 500 has rallied approximately 13.5% on an annual basis compared with an all-Democratic government, which has seen the S&P 500 rally by about 10%. We have also seen an outperformance in ten-year Treasury returns, with a divided government seeing it rise about 8%, while a one-party Democratic rule has seen ten-year Treasury returns rising only about 1%.
01 | Republicans are still expected to have an eventual slender majority in the House, but a Democratic majority remains a possibility.
02 | The market expected a red tide, where Republicans took control of the House and the Senate, so the initial reaction was for some sell-off in equities, alongside a muted reaction on the Treasury market and on the dollar.
03 | Overall, tight fiscal policy would not aggravate the inflation situation in the United States. This could mean the Fed might be closer to a peak in rates.
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