Democrats Control Congress, Stocks?

We are considering the question:

Assuming the Democrats take control of Congress on November 6. what will be the immediate impact on US stocks?

Let’s take a look at the context.

1. Rightly or wrongly, market sentiment gives Trump credit for the spectacular rise since he took office.
2. Expectations are for the Democrats to take control of the House – all 435 seats are up for grabs; and for
3. The Republicans to retain the Senate. Here the battleground is over 35 of 100 seats. The Republicans have nine to defend, while the Democrats have twenty-four.

How correct do I think is the consensus view?

Personally, I see the Democrats as winning control of Congress. The reason being, they seem to be making better inroads into getting their base to vote.

There was a time when US politicians got elected by appealing to the undecided voter. Not any more. Now it’s all a question of getting the base to support you.

So why are the Democrats doing a better job? It’s because they have a larger pool to motivate.

Midterm elections are notorious for a poor turnout.  This year the Democrats have a myriad of reasons for believing they can succeed.

1. A record number of Republican incumbents are leaving Congress. Historically, incumbents have a better chance of winning, so their departure is a Democratic assist.
2. Historically, the President’s party usually loses seats in midterms.
3. Finally, the Democrats have a ‘surge of women’ standing for election. Trump’s record in this area is poor (putting it mildly. From sexual harassment claims to perceived sexist comments).  If the Democrats appear to be galvanising female voters in these elections.

Taking those elements together, you have a scenario where the Republican base will not match the Democratic participation.

If the Democrats do take control, what will it mean for the indices?

In the short-term, I expect the event to a surprise event that will cause stocks to head South. In the longer-term, the stock market has tended to rise when Congress is under Democratic control (see “What Democrats retaking Congress could mean for stocks“)

So how to trade?

On Nov 6, I’ll be watching the news to see if I can repeat the Brexit success. Two different events. I’ll be more cautious here.

In the Senate race (currently 51 R-49D):

• Democrats have to retains West Virginia, North Dakota, Missouri, Montana, Indiana, and Florida.
• They have to win, Nevada, Arizona and perhaps Tennesse or Texas.  Tennesse is the more likely to turn blue.

In the House race (currently 237 R – 197 D):

See “House Races to Watch Right Now“