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Should investors be blue or elated? Probably neither. The sharp US congressional swing to the Democrats could herald a more interventionist attitude towards business. Divided government could also have the side effect of greater fiscal discipline. Conventional wisdom sees this as positive for the dollar and bonds and less good for stocks in areas such as defence, energy and pharmaceuticals.
In fact, the outcome of the elections – at least as far as the Republicans’ loss of the House of Representatives is concerned – has been on the cards for weeks. There have even been hints that stock markets welcomed the prospect, rallying as Democratic success became more probable. All that helps explain the overall calm in US markets aside from some individual sectors such as healthcare and drugs.
The Bush administration has been struggling to achieve much recently, even with control of Congress. But the legislative process is now set to be more or less gridlocked. The Democrats are unlikely to be able to push big policy changes through. But if they win the two close-run Senate seats and secure a majority there, they could put President George W. Bush on the spot by forcing him to veto legislation. That could be used against the Republicans later.
That does not mean that nothing happens for the next two years. The Democrats have levers they can pull – for example, using control of congressional committees to probe issues such as energy company pricing, the cost of drugs and executive pay. Individual stocks could suffer from the uncertainty that aggressive probes would create.
Markets could also react to previews of what the Democrats might do after 2008 if they win the presidency. While pressure to raise the minimum wage should have little economic impact, any concrete moves towards higher taxes or protectionism could rattle investors. The danger is the Democrats, after their long wait, get carried away. Cooler, practical heads should know this is their chance to put themselves in the driving seat for 2008 and will not want to blow it.