Will a Democratic House Crash the Markets?

U.S. midterm elections are always disruptive to the market, but currently they’re coming at an exceptionally bad time. Both political and economic uncertainty are currently contributing to the market’s volatility, and both parties — Democrat and Republican — are casting blame on each other.

With Democrats now in control of the House of Representatives, investors are left wondering whether or not the Republican-led bull market will continue. Are Democrats going to crash the markets?

Democrats Take the Majority
It may not be specifically a question about politics, but rather a question about unity and division. Divided governments tend to perform far more poorly than united governments, as it becomes more difficult for the government to operate effectively. Due to that fact alone, a Democratic Congress could potentially hurt the market — and it could actually be more harmful if they are only able to win one chamber of Congress.

But it isn’t only that. There are many industries, such as the energy and gas industry, that have relied upon a Republican government for more favorable regulations. There is also the general, overarching perspective that Republicans tend to be better for business. The market moves on sentiment as much as it does on fundamentals; knowing that a Democratic congress is in place could easily lead to investor anxiety (in fact, in many ways, it already has).

“You’re Going to Lose a Lot of Money”
President Donald Trump himself has stated that Americans are likely to lose a lot of money in the event that midterm elections go the way of the Democrats. Though he hasn’t expounded on this extensively, it’s inarguable that investors are worried about Democrats potentially taking Congress. Presently, the economy is functioning quite well.

The Republican majority in the House of Representatives, which has held strong since 2010 until this week, business-positive measures were passed more easily. With the upcoming Democratic majority, it’s very likely that many business-positive measures could be blocked off or slowed down. With any other social or political concerns aside, investors may see this as being ultimately bad for business. This has been contributing significantly to the current volatility of the market.

A Market Crash Becomes More Likely
The market fundamentals will not immediately change the moment new Democratic representatives are sworn in. Companies will not be worth less immediately, but rather many are looking towards the potential long-term effects. While the economy has been doing well previously, it’s been doing well because the government has been unified, whether Democratic or Republican.

In the wake of Democratic gains in the House, however, many analysts have already been predicting a stock market crash. There are many indicators of a stock market crash already present; with another destabilizing factor, a crash is very likely. However, it’s also important to note that crashes are a natural and important part of the economic cycle. It is not a question of if a crash will occur, but rather a question of when it will happen — and how severe its effects will be.

For investors, investing in the market now could be extremely risky — but also potentially very rewarding. The market is now experiencing extremely high volatility levels, leading to cheap purchases for companies with solid fundamentals, but also the potential for losing quite a lot for those in high risk sectors.

Investors should be extra careful now, and plan both their short-term and long-term strategies accordingly.


Ethan Warrick
Wealth Authority

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