Midterm outcome could be ‘glowing good news’ or ‘disaster’ for markets

A Republican victory, where GOP candidates hold the majority in the House and build on the Senate majority could spark a rally, said Cashin.

“Glowing good news,” said Massocca of a GOP win. But the market also would also be affected by other factors after an initial positive reaction.

For instance, some strategists say a Republican sweep could send Treasury yields slightly higher, as the bond market worries about more deficit spending and more U.S. Treasury issuance if Republicans expand tax cuts. Those rising yields could ultimately weigh on stocks.

“Americans realize that we have one of the spectacular economies in our country’s history…does it really make the market go higher? [Fed Chairman] Jerome Powell has more power over where the market goes than Donald Trump does at this point,” he said.

As soon as the results are in this week, the market could quickly turn its attention to the Fed, as it begins a two-day meeting Wednesday. While the Fed is not expected to raise interest rates this week, it is likely to do so in December.

Massocca said trade could be another big factor for the markets, regardless of who wins Congress. President Donald Trump has said China wants to do a deal, and he will meet Chinese President Xi Jinping at the G-20 summit at the end of the month. But strategists are skeptical progress will be made soon, and Trump has also vowed to slap China with more tariffs if things don’t go well.

“If these tariffs could be effective in winning some short term victories that’s a very good thing,” said Massocca. “If we get a protracted trade war, that’s a bad thing. To the extent his agenda is jeopardized the market will not like that.”

The least likely scenario—a Democratic sweep— is also seen as the most negative for stocks.

“Disaster,” said Massocca.

Source: CFRA

But Wall Street strategists say Congress would still have little power to make changes.

“If Democrats sweep, they won’t be able to change fiscal policy before 2020, but it would change expectations about the trajectory beyond it,” wrote Morgan Stanley strategists. “All of a sudden, it would be reasonable to think about fiscal contraction (i.e., rolling back some tax cuts), albeit after 2020. This shifts the narrative away from rising rates and, in the near term, alleviates the pressure stocks have felt in recent weeks from risks of higher input costs.”

While that is not a likely scenario, there is the possibility Democrats could gain in other ways and win some gubernatorial races, like Florida or Georgia.

“There are going to be a lot of elections that are going to be whisker thin in terms of votes. I think the concerns of the market will be that the Bernie Sanders wing of the Democratic party is gaining traction, and in two years from now, it will elect more candidates,” said Massocca.

WATCH: Robert Shiller on midterm election year patterns

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