An economist stated that the impact of Democrats controlling Congress on the market may not be as significant as investors expect.
After the Democratic Party won control of Congress in the midterms, the U.S. stock market soared on Wednesday. The Dow Jones Industrial Average rose by 3%, posting its best single-day performance in 18 months; the S&P 500 index increased by 1.6%; and the Nasdaq index rose by 1.4%. Investors are betting that a divided Washington will limit some policy changes that could shake the market.
This trend indicates that investors believe the election results will serve as a check on fiscal expansion, the Iran war, and other White House actions that have been unsettling to the market.
However, GlobalData TS Lombard Chief US Economist Steven Blitz stated that investors may have overestimated the impact of this result on future prospects.
Blitz wrote in a report on Wednesday: 'The Democrats will control Congress in the next two years, but they will not control Trump.'
The Democrats will not take control of Congress until January. They also lack the two-thirds majority in both the Senate and the House of Representatives required to override the president's veto.
However, the Democratic Party can still influence budget negotiations and healthcare spending, as well as review or attempt to influence the policy environment regarding data centers and artificial intelligence.
But Blitz writes that the White House will still retain considerable discretion in areas such as trade, foreign policy, and executive actions, which have a significant impact on companies and markets.
Blitz also questioned whether control of Congress by the Democratic Party would lead to lower government borrowing and lower yields on U.S. Treasury bonds, as some investors expect.
He wrote, "The Democrats are not aiming to reduce the budget deficit; they just want to change the purpose of the deficit."
Blitz does not believe that a comprehensive revaluation of tech stock prices is the biggest risk facing the market.
He said that relative to GDP and the yield of benchmark 10-year U.S. Treasury bonds, stock valuations are reasonable. As a widely watched indicator for measuring expected stock market volatility, VIX also does not show any abnormal pressure.
He added that, on the contrary, changes in the correlation between stocks indicate sector rotation, rather than preparing for a broader bear market.
On Wednesday, stocks in non-essential consumer goods categories and hospital operators rose, while data center operators and semiconductor companies fell.
Blitz predicts that despite the potential rise in inflation, the economy will improve by 2027.
For stock investors, the bigger question is how fiscal policy, inflation, the Federal Reserve, trade, and geopolitics will change the prospects of various sectors.
Blitz writes: 'In the future, equity returns will increasingly depend on policies (including those of the Federal Reserve), rather than the revaluation of technology sector stocks.'
On Wednesday evening, U.S. stock index futures showed mixed movements. Dow Jones futures rose by 0.3%, S&P 500 index futures fell by 0.3%, and Nasdaq futures declined by 1.1%.
