Lack of ‘red wave’ spells downside market risk, Evercore ISI says
The stock market may be vulnerable to further losses if Republican performance doesn’t live up to pre-election expectations, Evercore ISI said. The bank’s senior U.S. policy and politics strategist Tobin Marcus said a “red ripple” or “purple haze” rather than an expected “red wave” could spur a market selloff, which Evercore ISI would see as an opportunity to accumulate stocks. Many key races in the House of Representatives and Senate are too close to call by NBC News as of Wednesday morning, leaving the future leadership of Congress uncertain. “Because we believe that a clearer red wave was priced in, the immediate risk to markets is probably to the downside,” Marcus said in a note to clients. “We have generally taken the view that a pro-Democratic surprise might drive a short-term selloff, even if Dems do not actually retain their House majority.” Political observers had expected the GOP to win more seats, especially in the House of Representatives, in the U.S. midterm election as voters placed more weight on pocketbook issues such as inflation and rising interest rates rather than social policy over abortion and crime. The conventional wisdom on Wall Street is that gridlocked federal government gives investors less reason to worry about stepped up government regulation, spending or taxes. NBC News has yet to call which party will hold the House or Senate, given the uncertainty in key races. But while Marcus said Tuesday’s election could still result in Republicans retaking one or both chambers of Congress, results so far mark a turn in sentiment from what had been seen by some as a potential Republican “wave.” In the meantime, Marcus said continued uncertainty won’t be welcomed by markets, as absentee ballots are counted and more races are called. “The fact that control of the Senate will remain unknown for an extended period probably means some choppy market movements in the days and weeks ahead,” he said. “But it also likely reduces the chance of a major negative reaction in the short term, as it means that the (limited) implications of Senate control conditional on GOP House control will have time to sink in slowly.” Marcus said a Republican-majority House is still in the picture, which means market expectations could stay intact. But he only partly agrees that a gridlocked government would be viewed by markets as a “risk-friendly” outcome, noting that a reduced risk from aggressive policy measures could be offset by “the risk of greater chaos next year.” — CNBC’s Michael Bloom contributed reporting.