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Split Congress Would Be Best Scenario For Markets - Analysts

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(Kitco News) - American voters are heading to the polls today to cast their ballot in the much-anticipated midterm elections.

Political pundits expect to see a split Congress with the Democratic Party taking control of the House and the Republican Party maintaining control of the Senate. While equity market and U.S. dollar investors appear to be favoring a Republican victory in Washington, some analysts say that gridlock could be best for long-term gains.

Crunching data as far back as 1950, Hussein Sayed, chief market strategist at FXTM, said that on average, the S&P 500 has seen average returns of nearly 16% in the 12 months following a midterm election where Congress was split and a Republican President was at the helm.

“While such anomalies are difficult to explain, investors may find that a gridlock produces more predictable political outcomes to model and value equities against. In the case of a gridlock, Democrats cannot roll back recent tax cuts, neither can they tighten the Dodd-Frank banking rules,” Sayed said in a report Tuesday.

Win Thin, global head of currency strategy at Brown Brothers Harriman, agreed that a split Congress would be the most supportive outcome for financial markets.

“The economic status quo would continue but having one Democratic chamber would allow for some checks and balances on the Executive branch,” he said. “The Fed will feel comfortable continuing the tightening cycle, while another round of tax cuts becomes more unlikely.”

Looking at the other two outcomes, analysts have said that markets appear to prefer Republicans maintaining control over Congress compared to Democrats in power. Sayed said that Democrats controlling Congress is a “nightmare scenario” for markets.

“The Trump impeachment threat will become more real, but still, this would require help from some Republicans,” he said. “Even if he doesn’t get impeached, the President will no longer have the power to pass bills and probably lead to pulling back some of his deregulatory actions, which definitely is not liked by corporate America.”

Jasper Lawler, head of research at the London Capital Group, said that he would expect to see aggressive selloff in equities and the U.S. dollar if a blue wave did sweep through Congress.

Thin added that he sees downsides to both scenarios where either party controls Congress.

“If the Republicans are able to hold on to both houses, we think this would ultimately prove to be negative. The administration may feel emboldened to enact another round of ill-advised tax cuts. The budget deficit has already widened even as the economy continues to grow robustly. Another slug of fiscal stimulus might buy a couple more quarters of growth, but it would come at a high cost when the next recession hits,” he said.

“If the Democrats are able to take back both houses, we think this too would be eventually be negative for the markets. The Democrats could try to rescind the tax cuts and regulatory rollbacks enacted so far that equity markets have liked," he added.

As for gold, George Milling-Stanley, head of gold investments at State Street Global Advisors, said he sees the yellow metal doing well in a split Congress.

“I think will get continued gridlock in Washington and that will ratchet up political uncertainty and I think that is going to be positive for gold.”

Richard Hayes, CEO of Perth Mint said, in a recent interview with Kitco News, said that a Democrat-controlled Congress would increase sales of physical silver and gold bullion.

“If Trump doesn’t do well during the mid-term elections it will bring people back to the bullion market,” he said. “For many bullion consumers, Trump is their guy and with him in office and Republican’s controlling Congress they haven’t had the need to buy gold and silver as an insurance policy.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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