Divided government outcomes tend toward legislative gridlock. And though divided governments could still influence the outlook through regulatory reinterpretations and resulting impacts to business sentiment, they are unlikely to deliver transformative policy in a macro sense. Hence, divided government is unlikely to deliver policy that counteracts the current late-cycle economic condition.
A more surprising observation might be that we see some symmetry to the potential direction of the macro impact in both unified government scenarios. While far from assured, both open the possibility of fiscal expansion, fueled in part by messaging driven implicitly by ideas such as the Laffer Curve and MMT.
This conclusion appears to cut against investor expectations, at least as it pertains to the "Blue Wave" scenario. Our survey suggests investors see a Democratic White House as both less likely to pursue cycle-extending policies like fiscal stimulus and more likely to coincide with risk-asset weakness. Perhaps it is because investors also see Democrats as more likely to pursue policies that will challenge profitability in key sectors, such as prescription drugs and health insurance.
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The one thing I see around my neighbourhood in west Los Angeles is the houses that were posting Bernie Sanders signs in 2012 are now supporting Elizabeth Warren. The big question is whether the Democrat’s administrative body will favour anointed conventional candidates like Joe Biden over the progressive wing of the party in the same way it did for Hilary Clinton versus Bernie Sanders.