Harris or Trump may face a House or Senate run by the other party. Here's what that means for investors.

By Victor Reklaitis

It's quite possible that the next president will have to deal with a chamber of Congress run by the opposing party, and analysts are forecasting the financial implications

How tight is the White House race?

It's so close that analysts at Raymond James wrote in a recent note that Kamala Harris and Donald Trump each have a 50-50 chance. That basically matches what's being shown Wednesday by an average of betting markets from RealClearPolitics.

Analysts at BTIG see Trump as more likely to win, but say he's only "a very slight favorite." They give the Republican nominee a 55% chance of victory, citing "his lead on the economy and immigration in state-level polls."

But while predicting the winner of the presidential election seems tricky, here's one call about Washington, D.C., that appears safe: It's quite possible the next president will have to deal with a chamber of Congress run by the opposing party.

BTIG's Isaac Boltansky estimated there's only a 23% chance of Republicans securing control of the White House, Senate and House of Representatives in November's elections - and just a 5% chance for a Democratic sweep. In other words, there's a 72% likelihood of a president facing a Senate or House run by the opposing party. That's shown in the chart below from Boltansky, who is BTIG's director of policy research.

Raymond James analysts don't think a divided Washington is quite that likely, but they do see it as a real possibility, giving it a 40% chance. They reckon there's a 15% chance that Trump becomes president while Democrats take back the House, and a 25% chance that Harris wins while the GOP scores one or both chambers of Congress. (They give a 35% chance for a GOP sweep, and a 25% likelihood for a Democratic sweep.)

Trump and some Democratic control of Congress

So what would divided government in 2025 mean for investors?

If there's a split government with Trump as president, get ready for an extension of the GOP's 2017 tax cuts for individuals, but "key concessions will be required to secure Democratic support," said the Raymond James team, led by Ed Mills. There would be "greater variability in corporate SPX rate outcomes given a Democratic push to raise the corporate rate in combination with support from some congressional Republicans," the analysts added.

Related: Big debate ahead over the Trump-era tax cuts that expire in 2025

Also: A Democratic sweep could mean a $2 trillion tax hike for S&P 500 companies over coming decade

Also for that scenario, the Raymond James analysts expect increases in tariffs and trade restrictions, along with "greater volatility with China MCHI." Trump often promises exactly that in campaign speeches, and presidents have many options on trade that don't require an OK from Congress.

In addition, there would be a more favorable environment for smaller mergers and acquisitions MNA, according to the Raymond James team.

BTIG's Boltansky predicted that a second Trump term with Democratic control of at least one chamber of Congress would include reversal of many of the Biden-Harris administration's regulatory actions, expansive use of executive actions and risks around deadlines for funding the federal government or lifting the U.S. debt ceiling. On the defense ITA front, aid for Israel and Taiwan would continue, but assistance for Ukraine "would face headwinds," he said.

Harris and some GOP control of Congress

If Harris is president and the GOP runs at least one chamber of Congress, Boltansky said there also would be expansive use of executive actions and risks around deadlines for funding the federal government or lifting the U.S. debt ceiling. Funding for Israel and Taiwan would continue, and Ukraine aid would be "modestly more difficult to secure," he wrote.

The BTIG analyst said he sees a limited extension of the 2017 tax cuts with a "pronounced focus on middle- and lower-income families."

In a similar vein, the Raymond James team said the lack of full Democratic control of Washington would "materially reduce the likelihood that the corporate rate is raised." The analysts also said they expect a continuation of President Joe Biden's China policies with "targeted trade barriers for China," as well as "active antitrust enforcement."

Overall, a Harris presidency and GOP-run Senate "could arguably be the setup that is most conducive to a predictable path forward," the Raymond James analysts wrote, arguing that this scenario would deliver a brake on "the extremes of Harris policy priorities."

'Gridlock is gold,' one investor says

Some investors could be hoping for a divided Washington. The chief investment officer and founder of the Bahnsen Group, David Bahnsen, hinted he's in that camp in a recent statement provided to MarketWatch.

"Gridlock is gold for markets DJIA, and a mixed result between one or both houses of Congress and the presidency is a high likelihood, and also historically correlated to strong returns in the stock market," said Bahnsen, whose Newport Beach, Calif.-based firm has $6 billion in assets under management.

"The market likes a divided government, and does not want any one party to have too much power or too much ability to enact legislation that could affect the business cycle," the CIO added.

Now read: Trump running mate J.D. Vance lashes out at Ph.D.s deriding Republican ticket's economic plan

And see: Trump and Harris spar over fracking as America's energy needs soar

Plus: EVs and the election: Here's how the $7,500 tax credit might change if Trump wins

-Victor Reklaitis

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10-02-24 1311ET

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