What to Expect From Divided Government

With Republicans having taken the U.S. House of Representatives and Democrats retaining the Senate, it looks likely the next two years will feature legislative gridlock.

Each party is on track for a razor thin majority in each chamber of Congress. This leads to another takeaway: The “red wave” that many pundits seemed sure of (although we had our doubts) never materialized and was instead replaced by a – choose your metaphor – “red rain drop,” “red ripple,” or “red whisper.” Indeed, Democrats may expand their majority in the Senate, depending on the outcome of the Georgia runoff race in early December.

Either way, wave or whisper, we believe the practical implications for the markets and the economy are largely the same whether Republicans had won only a House majority or won both the House and the Senate. After all, a majority is still a majority, and the primary levers for a party not in the White House – namely obstruction and oversight – will be available to House Republicans despite their skinny majority and control of only one chamber.