Beware a "Gridlock Rally"

Election day is tomorrow and will bring results for key Senate, House, and Governors races from all around the country, plus local legislative races and more. For the federal races, our projection is that the Republicans are essentially a slam-dunk to take back the House of Representatives (98% likely) and very likely to take back the Senate (about 80%).

To be exact, our best guesses are that the GOP will end up with around 53 seats in the Senate (which, if exactly right, would be a gain of 3) and 240 in the House (which would be a gain of 28 seats compared to where the GOP finished in 2020). We’re confident we won’t get this exactly right, but, as of today, that’s how we see the races breaking.

If you want a scorecard for the Senate races, we suggest focusing on five elections, in particular: New Hampshire, Pennsylvania, Georgia, Arizona, and Nevada. To keep the Senate, the Democrats need to win at least four of those five races. Not impossible, but very unlikely; we’re projecting they win only one of these, not four. In particular, if the Republicans win New Hampshire, they are also likely to win at least one of those other four states (and, therefore, Senate control), you might be able to go to bed early tomorrow night.

If we’re right about the election outcomes, or even close, many stock market investors might take it as a reason to be bullish. The result would be “gridlock,” which means no major federal legislation could be enacted unless it got significant bipartisan support.

Gridlock has been good for stock market investors in the past few decades, particularly when there’s been a Democratic president and the Republicans in control of at least one house of Congress. For example, under President Clinton, from the market close on election night 1994 – when the Republicans took control of both houses of Congress for the first time in forty years – to the end of the Clinton presidency, the S&P 500 generated a total return of 20.7% per year. Under President Obama, from the close on Mid-Term Election Night 2010 – when the GOP took the House and made gains in the Senate – through the end of his presidency, the S&P 500 generated a total return of 13.3% per year.