Investors to relish political gridlock in US after midterms

With the likelihood of political gridlock in the United States following the midterms, investors are feeling positive about the markets. Large Republican wins in the midterms are thought to dampen future Democratic spending and guidance.Though some regions are yet to close their polls, the GOP are expected to make gains and with Democrat Joe Biden as President, it would result in a split government.History has demonstrated that such political divide at the top has seen encouraging long-term market performance.Inflation is a key issue for voters across the United States and the issues confronting the economy are seeing voters divided between the two parties.Investors have voiced their concerns about increased fiscal spending which would worsen inflation, but significant Republican gains could alleviate some of these concerns. A split government could calm the markets (Image: Getty) Joe Biden could struggle to pass new initiatives with more Republican control (Image: Getty)Financial analysts Morgan Stanley said earlier this week that a wave of red support could help stocks prolong their gains and support a rally in 10-year Treasury bonds.Jack Ablin, chief investment officer at Cresset Capital in Chicago said: ‘I think the markets are rallying at the prospect of gridlock.’Fiscal spending has created a challenge for central banks worldwide. The prospect of no legislation is a bullish inflation signal.’With major policy changes prevented under political gridlock, investors have said that stocks tend to perform better.This rings historically true with split government’s when there is a Democrat in charge in the White House.The Standard and Poor’s 500 (S&P) is a stock market index comprising of the performances of 500 large companies listed on the US stock exchange.READ MORE: Couple’s dream wedding ruined as luxury hotel takes in asylum seekers Republicans are thought to make some key gains (Image: Getty) Barack Obama struggled against political gridlock which saw US credit rating downgraded (Image: Getty)According to data since 1932 which was assessed by RBC Capital Markets, the average annual S&P500 returns under a split Congress have been 14 percent while they were 13 percent when Republican’s held Congress and there was a Democratic president.When the Democrats controlled the White House and Congress, returns were at 10 percent.Chief market strategist at FS Investments, Troy Gayeski said that a Republican-controlled Congress may make ‘the Fed’s job a little bit easier to break inflation’.However, the Democrats will be concerned about the GOP using the federal debt ceiling against the President.DON’T MISS: Donald Trump demands voters protest as he claims election fraud again (INSIGHT)US midterms LIVE: Trump declares victory for Republican Party (LIVE)Trump will not detract from midterms but will make ‘announcement’ soon (REVEAL) Voting has almost closed across the US with Alaska the only votes left to close (Image: Getty)The US Treasury is thought to hit is assigned $31.4trillion (£27.2tr) borrowing limit in 2023 and the GOP may use this to limit new initiatives by the Democrats such as climate change and social programmes.It is expected that a gridlocked system will see tensions rise between the two parties over the federal debt ceiling which saw Standard & Poor downgrade the US credit rating for the first time in 2011, which sent the markets into a tailspin.Under Barack Obama, Standard & Poor’s decision to reduce the AAA credit rating saw stocks plummet over five percent.Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York said: ‘If the Republicans really gain some power here, in the House and Senate, they can make (raising the federal debt ceiling) a really difficult process.’