A Divided Government Could Backfire for Wall Street

Midterms are expected to result in Democratic wins that would mean a divided government as Trump finishes out his presidency. The conventional wisdom on Wall Street is that a divided government is a good thing for investors. This time around could be different.

Gene Goldman, Cetera's chief investment officer, explains it simply: "Equity markets like divided governments because nothing gets done." Markets don't like uncertainty and a divided government makes it harder for things to change, effectively creating political gridlock.

Ed Yardeni at Yardeni Research said political gridlock may not actually help the market for two reasons.

"First, deepening partisanship could turn gridlock into damaging political paralysis at a time when the Bond Vigilantes are already uneasy about Washington's unsustainable fiscal trajectory," he wrote. A blue wave could result in prolonged fiscal debates, ultimately pushing Treasury yields higher and weighing on stocks.

"Second, gridlock's traditional ability to constrain policymaking may not hold this time. President Donald Trump has relied heavily on executive authority, with some of his most market-disruptive policies, including tariffs and military action against Iran, pursued largely without congressional approval," Yardeni said.