U.S. stock indexes jumped higher on Wednesday as investors hailed the results of the midterm elections that saw Democrats take control of the House of Representative, while Republicans secured the Senate.
The Dow Jones Industrial Average gained 227 points to 25,855, the Nasdaq Composite Index jumped 0.8% to 7,438, while the S&P 500 index climbed to 2,779.
History suggests that a divided Congress tends to be bullish for stocks, despite strategists’ general opinion that stock markets would have benefited from continued Republican control of both houses.
Stocks have performed best with a Democrat-controlled Congress and a Republican president (posting average gains of 15.7% between 1950 and 2017), followed by gains of 18.3% with a divided Congress and a Democratic president, based on figures compiled by LPL Financial.
Democrats have the chance to block any policies that President Donald Trump and the GOP have in mind. However, both parties are likely to agree on common issues such as infrastructure development, which could be a huge boost to companies within the transportation and construction sectors. On the other hand, financial sector stocks might end up sinking if Democrats lawmakers initiate investigations on big firms and banks.
Democrats are also likely to push for a higher federal minimum wage and deter any further tax cuts. Now that they have the numbers needed to counter conservatives, there is also a high likelihood that the government could shut down.
If that happens, investors could find themselves between a rock and a hard place. During the 2011 debt-ceiling crisis, the S&P 500 index plunged nearly 20% after a heated political debate that culminated a congressional gridlock.
Nonetheless, a legislative gridlock is not likely to change the ongoing trade war between the U.S. and China. Both Republicans and Democrats back a tougher stance on Chinese intellectual property and trade practices, so not much is expected to change.