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The Election Showed a Divided Country. Investors Can Live With That. The Election Showed a Divided Country. Investors Can Live With That.
(about 7 hours later)
Investors on Wednesday appeared to take the prospect of a divided government in Washington in stride, as Asian markets closed mixed, European markets gained ground and Wall Street looked set for a positive opening. Stocks jumped on Wednesday, extending a recovery from the sharp sell-off in October with broad-based gains, after midterm elections that will split control of the United States government between both major parties.
Markets in Tokyo and Shanghai fell slightly the day after the Democratic Party won a majority in the United States House of Representatives. In Europe, the major stock markets were trading about 1 percent higher. The S&P 500 rose 2.1 percent, led by giant technology companies including Amazon, Apple and Google. The tech-heavy Nasdaq composite index rose 2.6 percent, its strongest gain this month.
The election results were largely as expected, and trading was tame. Stock in consumer discretionary companies climbed 3.1 percent, in a sign of growing optimism that President Trump, stung by his party’s loss of the House of Representatives, could seek a win by striking a trade bargain with China at the Group of 20 summit meeting this month. Shares of Wynn Resorts, the casino company with significant business in China, jumped 3.9 percent.
The potential for political gridlock, as President Trump faces a House controlled by Democrats, has already been priced in, said Geoffrey Yu, head of the United Kingdom investment office at UBS Wealth management. After weeks of uncertainty heading into the election, investors seemed to focus again on the strong fundamentals for American businesses, helping fuel the gains on Wednesday.
“The pundits and the pollsters called it right,” Mr. Yu said. The appetite for stocks, reflected in the rising indexes, he added, “suggests the Republicans performed slightly better than expected.” In the voting on Tuesday, Democrats secured control of the House in the next Congress, while the Republicans padded their majority in the Senate. A divided government is conventionally thought of as good for stock investors, because it means lawmakers are unlikely to produce sweeping policy changes.
In Asia, markets slumped the most in China, where slowing economic growth and the trade war with the United States have been the main market drivers in recent months. Stocks there closed 0.7 percent lower on Wednesday. The Nikkei in Japan closed down less than half a percentage point, while the Hang Seng in Hong Kong ended the session slightly higher. “Investors can basically refocus their mental energy away from the macro and back to the micro, where earnings are really good and valuations are really reasonable,” said Julian Emanuel, chief equity strategist at the institutional brokerage BTIG.
Futures that track stocks in the United States signaled a small bump could be in the works on Wednesday morning. Futures that track the S&P 500 were up 0.6 percent. Industrial shares rose, bolstered by renewed hope for a bipartisan infrastructure-spending bill. The construction machinery maker Caterpillar, which also has large exposure to China, rose 4.5 percent.
Investors see a Democratic-controlled House as an obstacle to Mr. Trump and his efforts to cut regulations affecting the finance industry and the environment, though it is unlikely to have a major effect on the United States economy. The Senate remains in Republican control, where the party gained seats in rural areas where Mr. Trump has strong support and where he campaigned in the last few weeks. Health care shares rallied on the prospect that major health legislation is much less likely. Managed care companies that sell contract Medicaid services to state governments and insurance products on health exchanges established under the Affordable Care Act rose sharply.
“Their implications are likely to be confined to shaping the regulatory and fiscal environment for specific sectors, notably financials and industrials,” UBS said in a note on Tuesday. “You worry less about large sweeping regulatory change,” said Zack Sopcak, an equity analyst covering managed care companies for Morgan Stanley. “It means a repeat of ‘repeal and replace’ is off the table,” he said, referring to the potential for a wholesale replacement of the law, commonly known as Obamacare.
And it could lift the markets. Torsten Slok, Deutsche Bank’s chief international economist, noted that “a split Congress has historically been bullish for equities, and we expect to see the same pattern again.” After an ugly sell-off in October, investors appear to have regained their appetite for stocks. The S&P 500 has risen in four of the first five trading days of November. The 2.1 percent gain on Wednesday for the broad index of large companies was its third-best showing this year.
The impact on Mr. Trump’s trade war with China is less certain. The loss of the House to the Democratic Party represents a blow to the Republican Party and to Mr. Trump, and it signals dissatisfaction with his leadership. At the same time, Mr. Trump has wide latitude to act by himself on trade without input from Congress, and some Democratic lawmakers are sympathetic to his attitude toward Beijing. That turn of events reflects a dizzying swing in market sentiment. As recently as Oct. 29, the market was down more than 1 percent for the year after a rout that started in September had vaporized nearly 10 percent in gains.
Investors will be looking toward the next Group of 20 summit meeting, at the end of November, with that in mind, said Mr. Yu of UBS. “People are going to be less negative, relatively optimistic,” as they head toward that, he said. At that time, investors saw ubiquitous threats to the nearly decade-long rally for stocks. The potential pitfalls included rising interest rates, climbing commodity and wage costs, signs of slowing growth in China and Europe and the tariff war between the United States and China, the world’s two largest economies.
Most of the issues remain unresolved, but the markets have found their footing and trading seemed to suggest investors see reasons for optimism now that the elections have concluded.
Equity investors are now sitting on gains of more than 5 percent for the year.