If the GOP Wins Congress, What Would That Mean for Investors?

Odds are strong that Republicans will prevail in the midterms. Look out IRS and SEC.

In a little more than four weeks, voters will decide if the Democrats get to hang onto their tiny margin to control Congress. History doesn’t favor the party occupying the White House—and especially when the president has low polling numbers.


Should the Republicans capture both congressional chambers, President Joe Biden’s agenda would be stalled, political observers say. For the financial community, a GOP win could bring changes affecting Wall Street and institutional investors.


With a Republican Congress, there could be appropriations problems for the Securities and Exchange Commission, whose Biden-appointed chief, Gary Gensler, has taken an activist position that rankles many Republicans. Gensler wants to more tightly regulate hedge and private equity funds, as well as market makers’ payment-for-order-flow operations.  


A Republican Capitol Hill majority also could stymie Biden’s plan boosting appropriations to enlarge the Internal Revenue Service, an expansion in line with a provision in the mammoth climate and health care bill that recently passed Congress. Republicans complain that adding more IRS agents would lead to harassment of small businesses. Democrats say a bigger agent force would crack down on wealthy tax cheats, including large public corporations, which could put pressure on their stocks.


Although a Republican Congress and a Democratic White House have the makings for epic legislative gridlock, there are some areas where lawmakers could reach bipartisan agreements. An analysis from Morgan Stanley Wealth Management pinpointed greater defense spending,  cybersecurity, supply-chain strengthening and tech regulation.


In the 22 midterm elections from 1934  to 2018, the president’s party has lost an average 28 seats in the House of Representatives and four Senate seats, per the American Presidency Project study organization, at the University of California, Santa Barbara. Right now, the Dems have a mere eight-seat advantage in the House, where the split is 220 to 212, with three vacancies. In the Senate, the split is even, with Democratic Vice President Kamala Harris breaking ties.


The only times in the past four decades where the president’s party has won seats in the midterms has been in 1998 (Bill Clinton’s second term) and 2002 (George W. Bush’s first term). Both presidents had high approval ratings then.


One bright spot: Since 1982, the S&P 500 has logged an average return of 14% in the 12 months following a midterm election, thanks to the “clarity” the voting provided, according to an analysis by Fred Alger Management.


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