Wall Street backtracks on 'gridlock is good' stance with post-election stimulus at risk

Investors are having second thoughts about which election outcome may be best for the financial markets, according to JPMorgan.

Wall Street, which typically likes gridlock in Congress since it thwarts major regulatory changes, now fears a Democratic and Republican split will delay stimulus efforts the economy badly needs.

A Biden victory and Republicans retaining the Senate was previously thought of as a best-case scenario for financial markets, but that may no longer be the case as Congress has yet to agree on a new stimulus package.

"Market expectations are now set up for a Biden win and a front-loaded fiscal package into 2021, and there is room for disappointment if these assumptions do not come to fruition," according to participants in JPMorgan’s virtual investor conference call held on Oct. 14. The call was conducted under Chatham House rules, meaning the identities of the speakers were not made public.

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Traders on the betting platform PredictIt say there is a 58% chance that Democrats sweep control of the presidency, House and Senate.

Expectations of a so-called blue wave have Democrats feeling confident over the possibility they will be able to ram through a hefty stimulus package in early 2021.

So much so that House Speaker Nancy Pelosi on Sunday set a 48-hour deadline for the White House to reach an agreement with Democrats if they want a deal passed before Election Day.

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That seems unlikely as the two sides appear to be far apart on a deal. Senate Majority Leader Mitch McConnell, a Republican from Kentucky, has floated a targeted stimulus package worth less than $500 billion while Pelosi and some White House officials have called for a bill worth $1.8 trillion to $2.4 trillion.

Against that backdrop, a failure by Democrats to win the presidency, House and Senate, which would leave the government divided, would increase the potential for a standoff over stimulus.

“If Biden wins the presidency and the Senate remains Republican, there could be some disappointment on concerns that the approval of a sizable fiscal package will face challenges,” according to JPMorgan.

The comments fly in the face of what Wall Street was saying just a few weeks ago -- that a divided government would produce the best-case scenario for the markets.

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“Gridlock is good for markets,” wrote Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA, who said a divided government would lead to the S&P 500 reaching 3,800 to 4,000 by the end of 2021.

Strategists at Goldman Sachs last month agreed, noting a mixed government would result in a “smaller change in interest rates and a reduction in political uncertainty,” and allow the S&P 500 to reach 4,000 by the middle of next year.