US stocks surged on Wednesday after Democrats won Congress, with investors betting on gridlock to curb policy risks.
On Wednesday the Dow Jones Industrial Average climbed roughly 1,500 points as Democrats secured a Congressional win. Market participants are wagering that divided government will curb policy risks, though analysts caution it also amplifies the danger of a debt ceiling standoff.
Brent crude futures dropped more than 8%, bolstering the argument that inflation is cooling. Yet US equity investors still face a debt ceiling battle over the statutory borrowing limit next year.
A legislature that stands against the White House finds it difficult to pass major tax or spending measures, which limits the potential for policy surprises.
Charu Chanana, chief investment strategist at Saxo in Singapore, told Reuters that political stalemate does not inevitably damage corporate earnings. She also noted that declining Treasury yields could help support equity valuations.
Historical trends are also bright: the S&P 500 has climbed in the 12 months following each midterm election since 1982.
Asian trading sessions on Wednesday painted a different picture, with technology shares driving the losses. South Korea's Kospi index slid 1.17% in Asian trading, while Taiwan's Taiex fell 2.3%, Euronews reported.
Tai Hui, chief market strategist for Asia-Pacific at J.P. Morgan Asset Management in Hong Kong, highlighted the danger.
“You do have a debt ceiling some time next year.”
Tai Hui, Reuters
Hui added that divided government ought to keep fiscal deficits more contained.
He attributed more of the market weakness to a narrative around artificial intelligence that started weeks prior rather than to the election outcome.
However, Michael Arone, chief investment strategist at State Street Investment Management in Boston, took a different stance.
“I don’t think the big risk to markets is from the blue wave; it’s investors overreacting to a blue wave.”
Michael Arone, Reuters
Data from Morgan Stanley shows an average one-year S&P 500 gain of 16% when Democrats control both chambers under a Republican president. A divided Congress has historically averaged around 23%, according to Tribune.
That difference underscores the assumption behind Wednesday's stock surge. If the debt ceiling is raised without incident, the relief trade remains intact, but a standoff would strain both equities and Treasuries.
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American Bitcoin Corp. posted about $126 million in Q3 net income, helped by a $197.3 million gain on bitcoin holdings, despite lower mining revenue.
SK Hynix shares fell 7.74% and KOSPI slipped 1.98% as Korean chip stocks dropped on worries that the new Democrat-led Congress will tighten AI rules.
Goldman says states set to tighten data centre rules account for 45% of planned US capacity, but expects any pauses to be short-lived.
After the Democratic midterm sweep, Fundstrat's Tom Lee expects tech stocks to climb 15%-20% as hedge funds rebuild exposure; data center stocks fell Wednesday.