Market experts explain why political gridlock is economy’s ‘best case scenario’

With control of Congress still up for grabs Wednesday following Election Day, some market analysts are signaling that a political gridlock by Republicans may be a positive for Wall Street and the U.S. economy.

"Gridlock is good from a market perspective because of the fact that we don't have to worry about any major tax reform or major regulations over the next two years," Key Advisors Group co-founder Eddie Ghabour said on "Varney & Co." Wednesday.

Thru the Cycle President John Lonski also told host Stuart Varney that cracking Democrats’ power "is good for the economy."

"You're going to go ahead and put a lid on government spending, government regulations as well as taxes, so that can only be viewed as a positive," Lonski said. "Right now, we are suffering from too much in terms of government spending, the rise in regulations and higher taxes."

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If Republicans take the majority of seats in either chamber, then they have the ability to reject legislation brought to the floor by President Biden and the Democratic Party. As of Wednesday afternoon, three races in the Senate are too close to call, but Republicans could still gain control of the House. 

"We were expecting a bull bounce going into the midterm election," Sounds Planning Group CEO David Stryzewski also said in an appearance on "Varney & Co." "It looks like the House is going to go Republican. And if that's the case, maybe this lasts for a while, but we're not going to have the same control as if both the House and the Senate would both come together."

"And so if you only have just the House, you're kind of going into the fight of your life with one arm tied behind your back," the CEO continued.

Ghabour agreed that control of just one chamber may not be enough to change America’s economic landscape.

"Overall gridlock was a best-case scenario from a market perspective, but at the end of the day, nothing's going to change the economic cycle that we are in right now," Ghabour said. "I think investors need to take a strong look at this rally that we've seen, this bear market rally, and in the coming weeks look to reevaluate their positioning because in our viewpoint, we are heading into a recession."

Lonski argued that the worst-case scenario would be no GOP gridlock at all, and Morgan Stanley analysts wrote a Democrat surprise would negatively impact equities.

"What if there is no gridlock? What if the Democrats hold on to power in the House and the Senate? Then I would be extremely worried, as would be the markets, and who knows where the federal funds rate might be," Lonski said. "Forget about 5% and change, it might be 6% or higher."

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With October’s inflation data out on Thursday, the market experts believe that rising consumer prices will remain a collaborative "challenge" for the Federal Reserve and Congress.

"We're a long way off from what Powell's goals are," Stryzewski said. "We're literally sitting here today in a housing crisis... We've got an energy crisis, we're looking at our deficit ceiling coming in January today. So as we talk about CPI, no way are we out of the woods when incomes don't keep up with it."

"The important fact is that even if [October's CPI] is 7.8%, which is what the consensus predicts, 7.8% is still much greater than the accompanying 4.7% year-to-year increase by the average wage," Lonski added. "So we continue to see the purchasing power of the average wage getting clobbered."

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