For months, the market has generally expected that the Democratic Party would regain control of the House of Representatives in this year's mid-term elections in November; now, there is an increasing belief that the Democrats also have a chance to win control of the Senate. The latest data from two major predictive markets, Polymarket and Kalshi, show that the probability of the Democrats taking control of both the House and Senate is stable at over 60%.

Bank of America believes that the "Blue Wave" ( Blue Wave ) in which Democrats achieved a great victory will lead to a wave of selling in U.S. stocks.

Public opinion polls have completely shifted in favor of one side.

Analysts predict that the Republican Party, led by U.S. President Donald Trump, will suffer losses in the midterms, largely due to voters' dissatisfaction with high living costs. A survey by Ipsos last month showed that living costs are the top concern for voters in these midterms, with 47% of respondents listing it as their primary issue. Voters are personally feeling financial pressure, especially when it comes to refueling their vehicles. A Fox News survey earlier this month indicated that 61% of voters consider gasoline prices to be a major problem, up from 48% two years ago.

Morgan Stanley stated that, based on historical trends, increases in fuel prices typically result in the ruling party losing more seats in mid-term elections. The research report cites data showing that since 1978, if oil prices rose from January of the year before an election to October of the election year, the ruling party has lost an average of 32 seats in the House of Representatives; if oil prices fell, they only lost an average of 6 seats.

Currently, the Republican Party holds a majority in the House of Representatives with a ratio of 219 to 214, and has a 53 to 47 advantage in Senate seats.

Several highly watched Senate election polls this month have shown that Democratic candidates are in the lead, even in traditionally red states such as Alaska, Iowa, Kansas, and Texas. The likelihood of Democrats taking control of both the Senate and the House of Representatives continues to rise.

Michael Hartnett, chief equity strategist at Bank of America, stated that the probability of Democrats taking control of both the Senate and the House in the midterms continues to rise, which poses a significant threat to risk appetite. He predicts that if Democrats win both chambers simultaneously, U.S. stocks could plummet by more than 10%.

This star analyst stated that it will not only affect the stock market. By then, the US dollar index and US Treasury yields are expected to decline, and international stock markets are likely to outperform those in the United States—conflicts at the trade and military levels will no longer suppress overseas assets. "The electoral landscape is shifting from populistic capitalism to populistic socialism. Taxation and regulatory measures are likely to increase, which will ultimately have a negative impact on corporate profits."

Hartnett wrote in a strategy report sent to clients: The policies used by the Democrats to curb inflation could disrupt the current K-shaped wealth boom (where high-income groups have strong consumption and asset prices appreciate rapidly). In his view, this would also threaten the surge in capital spending on artificial intelligence. However, the more fundamental impact is that Trump's political capital will be damaged. With the Democrats fully controlling Congress, it will limit Trump's ability to push the government, businesses, and resources to implement policies aimed at achieving a monopoly over resources and gaining an advantage over China in the AI sector.

And if the Republicans retain control of the Senate, Hartnett predicts that the stock market could rise by more than 5%. A legislative deadlock would create what he calls a "Brave Little Lady" scenario ( Goldilocks ): AI The boom in capital spending would be undisturbed, and the narrative of a strong dollar would continue. In the most optimistic scenario, if the Republicans sweep both chambers of Congress, the stock market could rise by more than 10%, AI and trading trends would continue or even strengthen further. However, the market predicts that the probability of this scenario occurring is only 9%.

Overseas markets will be attractive.

Hartnett is particularly optimistic about the Latin American market, especially since the results of the first round of Brazil's general elections were market-friendly.

Of the 20 countries in Latin America, 11 are currently governed by right-wing governments, covering a total population of 420 million. Last week, Brazil's benchmark stock index, the Bovespa, soared by 13%, indicating that the market seems to be embracing a shift towards fiscal consolidation, interest rate cuts, and pro-business policies. Harnett reminded that even though the Brazilian stock market has reached record highs, the overall Latin American stock index is still 35% below its historical peak from 2008.

Right-wing political trends are not limited to Latin America. In Europe, in addition to Germany, Italy, and France, Spain has also joined this trend. Spain will hold new elections on November 29th. Currently, the center-right parties are leading in the polls. Harnett believes that if fiscal conservatism is combined with policies conducive to growth in the future, this would be an early positive sign for European bonds.

Regarding the turbulent U.S. debt market, in the short term, he believes that although many investors are waiting for U.S. bond yields to reach 6% before entering the market to buy bonds, he has already recommended building a position in 40-year U.S. bonds in small lots, as well as indirect investments in targets such as the Russell 2000 index of small-cap stocks and real estate investment trusts, in order to capitalize on falling yields.

It should be noted that predictive markets are not entirely reliable. During the mid-term elections of 2022, predictive markets predicted that the Republican Party would experience a "red wave," but in the end, there was only a slight Republican advantage, and those predictions did not come true. Predictive markets can be easily influenced by sensational reporting, flawed or even fabricated polls, and large traders can also affect market odds. For example, the non-partisan forecasting organization Cook Political Report indicated that the race for the Senate had reached a "deadlock" with both parties having an equal chance of controlling it.

If the Republican Party loses control of both chambers of Congress, it would be a major setback for Trump. Libby Cantrell, the head of public policy at bond giant Pimco ( PIMCO ), wrote in a research report: "Once control of Congress is lost, a large portion of Trump's agenda will be hindered. If the Democrats take control of the House of Representatives, they will increase supervision of the government; if the Senate also falls to the Democrats, the supervision will be even stronger. The Democrats will have the power to subpoena witnesses and will have full control over committee and legislative agendas. It is very likely that they will launch a series of investigations covering issues such as the Iran war, the Epstein scandal, the spending cuts by the Department of Government Efficiency ( DOGE ), and potential conflicts of interest involving the Trump family."

Another significant aspect of the Democratic Party's control over the Senate is that it is almost impossible for Trump's nominees for Federal Reserve officials, judicial personnel, and other federal agencies to be confirmed by the Senate. "It will become extremely difficult for the President to get anyone approved by the Senate, regardless of whether there are disputes over the nominee. On some issues (especially housing), there may be more compromises between the two parties, as the Democrats need to prove their ability to govern, rather than simply obstructing the White House's policies," she believes. She argues that there isn't a huge difference between the Democrats winning just one chamber and winning both chambers, which are also the two most likely election scenarios at present. "The overall outcome won't be drastically different, because Trump still retains the veto power, and the vast majority of Senate bills require 60 votes to pass."

Jia Qingguo stated that the political landscape in the United States has undergone fundamental changes, and even if the Democratic Party comes to power in the future, it will be difficult for U.S.-allied relations to fully return to the past pattern.

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