The Dow Jones industrials like a divided government — so far. The blue-chip index closed Wednesday up 545 points after Democrats took back the House in last night’s midterms and Republicans strengthened their hold on the Senate.
It’s the Dow’s sixth up day in seven sessions, gaining 2.13 percent to hit 26,180 at the end of trading. Caterpillar, UnitedHealth, Pfizer and Microsoft all spearheaded the rise among the Dow 30 blue chips. Proctor & Gamble was the only company in the red.
The Standard & Poor’s 500-stock and the Nasdaq composite followed with increases of 2.12 percent and 2.64 percent, respectively.
Oil prices dropped again, their sixth down session in a row.
“With the conclusion of this year’s midterm elections, the cloud of uncertainty has been lifted, allowing stocks to resume their recovery from the October sell-off,” said Sam Stovall, chief of U.S. equity strategy at CFRA.
Tuesday’s split decision of Democrats taking the House and Republicans keeping the Senate puts the kibosh on any tax cut that President Trump was proposing for the second half of his term.
Goldman Sachs on Wednesday said it does not expect any tax legislation over the next two years.
“Having gotten tax cuts, spending increases and deregulation in the past two years, the market is glad to take two years of stasis now,” said Ed Keon, chief investment strategist at QMA.
Michael Farr, a Washington investor, said he expects tempests between Trump and House Democratic leader Nancy Pelosi.
“Nancy and Maxine Waters should circle the wagons daily,” Farr said. “I think we go back to a no-budget world of continuing resolutions and threats of government shutdowns.”
He expects that House Democrats will not be friendly to the financial sector.
“Waters as new chair of the House Financial Services Committee is no friend to Wall Street,” Farr said. “Those companies will have to watch their backs.”
Looking ahead, the one place Trump and Democrats may find common ground is infrastructure. Both sides have shown a willingness to pass legislation on that, as it reaches into every corner of the country and gives both parties something to brag about.
Construction, materials and industrial stocks, including Honeywell and United Technologies in addition to Caterpillar, could benefit from a big infrastructure program that includes ports, airports, roads and bridges. That would be good for growth, but not good for the federal deficit as it would require the government to borrow more money. Investors also like Democrats as a check on Trump trade policies.
Farr agreed that infrastructure may be common ground for both parties, but there isn’t much else the two sides share.
“Immigration and trade still largely fall under the president’s purview and will likely continue without much change,” he said.
He also expected some news to be made from special counsel Robert S. Mueller III in the near future.
“He was quiet pre-election,” Farr said. “Finally, markets don’t have a lot in this election to derail them or further ignite them. Caution is warranted.”
Kristina Hooper, chief global market strategist at Invesco, said Wednesday’s rebound was baked in to the market, including the drop in technology stocks leading up to the election.
“Over the last month, the stock market began to price in this political scenario, which is one of the reasons we saw stock losses and higher volatility,” Hooper said.
“There is the potential for tech to come under greater regulation with the new composition of Congress. That was also priced in for the last month,” she said, “so I’m not surprised to see tech up today in keeping with the adage of selling on the rumor, buying on the news.”
Hooper said the gridlock in Congress is affecting health-care companies “because the Affordable Care Act will be protected with a Democratic majority in the House and because of the success of Medicaid expansion ballot initiatives. That’s particularly good for hospitals and insurers.”
Hooper also stated that companies such as Caterpillar are likely to benefit given the chance that Trump and Pelosi may agree on a big infrastructure spending bill.
Jeffrey Schulze, investment strategist for ClearBridge Investments, a New York-based affiliate of Legg Mason, said the S&P 500 should continue to march higher for the rest of 2018 and into 2019.
But, he said in a note Wednesday morning, “the change in congressional leadership could lead to increased volatility for the market broadly, particularly as it relates to government shutdowns and debt ceiling raises.”