The final tallies of the 2022 midterm elections are still unknown, but the potential for a coming divide—even within the GOP itself—could lead to politically induced market volatility into 2023, said Brian Gardner, chief Washington policy analyst for Stifel.
If Republicans do ultimately win the House of Representatives, “they will do so with a narrow majority and, given factions within the GOP that often buck the party’s leadership, the House could be almost unmanageable and the odds of government shutdowns will increase,” said Gardner in his analyst notes today.
Even though the market prefers gridlock, there could be some weakness in equities and bonds “as the election failed to produce a clear check on the Biden administration. Investors might disapprove of the chaos that could descend on the capital,” Gardner predicted.
The gridlock could also create longer odds for passing government spending bills, and it will be even more challenging than previously expected to increase the debt ceiling, the veteran analyst said.
“If the U.S. enters a recession in 2023, a divided Congress will struggle to pass a fiscal stimulus bill, which will leave the Federal Reserve as the main institution responsible for setting economic policy in the country,” Gardner noted.
What will the gridlock look like? Republicans appear to have won the House, but they badly underperformed pre-election expectations. It could be several days before results in several key House races are known.
“The House majority will likely be 10 seats or less for either party, which makes governing challenging at best. The midterms have essentially resulted in gridlock,” Gardner said.
The Washington analyst predicted that the Senate will likely remain at a 50-50 split again, or at 51-49, giving the GOP a slight majority. That would still make it more complicated to pass the spending bill Congress needs to fund the government for the rest of the fiscal year, he said.
That will be particularly true now that a Georgia Senate runoff is required to determine the Senate majority in 2023, since passage of the spending bill could be delayed until the winner is decided by the runoff election Gardner said.
“If Congress fails to pass a bill for the entire fiscal year, it will likely pass another temporary bill [also known as a continuing resolution or CR] that funds the government into early 2023, since government shutdown in December is highly unlikely,” he said.
While some have suggested that the debt ceiling could be raised as part of a spending bill or in a separate bill, the chances of increasing the debt ceiling now rather than in 2023 are relatively low, Gardner predicted.