The Post-Election Stock Market Rally Could Reverse If Democrats Win The House (Although It Looks Unlikely)

The markets are pricing in a full implementation of the Trump agenda, but that may not happen with a split Congress.

We’re a few days removed from Donald Trump winning a second term in the White House, but the financial markets are still in a good mood. The equity market soared on Wednesday, but it’s been able to extend those gains through the 2nd half of the week. The S&P 500 and Nasdaq 100 have both added another 1% on Thursday and Friday (at least as I write this on Friday morning), while other Trump trades still look to be in good shape.

The problem is that we don’t know if this is a done deal yet. Republicans will take the White House and the Senate, but the House is still up in the air. Some 25 House races have yet to be called and, thus far, the currently tally is Republicans clinching 211 seats and Democrats securing 199. Neither has the 218 seats necessary yet to claim control of the lower chamber.

It may still be days before we have the answer and that puts the recent stock market rally at some risk. The markets are assuming that it will be a Republican sweep and Trump will have a clear path to implement his agenda. While that’s still a high probability, it’s not 100%. There’s still a very real possibility that a split Congress where Democrats win the House will stifle some of that agenda.

Of those 25 uncalled races, the Republican candidate is currently leading in 11 of them, while the Democrat is leading in 14. If those current margins hold, Republicans would ultimately take control of the House by a 222-213 margin. Some of those races, however, are very close and could end up swinging either way. It looks unlikely at this point that enough seats would shift from a Republican lead to a Democrat one that it would give Democrats control of the House, but it could put it very close to a near 50-50 split.

Even with the majority, that might not be enough of a margin for Republicans. We know that there are several Congressional members, such as Susan Collins and Lisa Murkowski in the Senate, that vote more moderately and could ultimately vote against some of Trump’s more hard line policy proposals.

If that happens, some of the tax cut, deregulation and business-friendly policies proposed by Trump could become more difficult to pass. That would be the case with Dem control of the House, but it may even be the case if the count is close to 50-50.

That’s what’s been driving a lot of the rally this week, so don’t be surprised if the markets start selling off depending on which way the election results break. Given how Republicans have been outperforming pre-election expectations across the board, this may not be an issue even as soon as next week, but we have to acknowledge the possibility that there’s a path where risk assets sell off next week.