Wall Street analysts bet Tuesday mid-term elections it will reverse control of Congress, with potentially significant implications for the US economy.

History confirms this: the presidential party has lost between 25 and 30 seats in almost every modern mid-term election. But this year the economy plays an excessive role. The last Gallup vote They found that some of the registered voters who call the economy “extremely important” at the ballot box are on the second-highest level in two decades.

The thing that obscures the picture this year is that the economy is sending mixed signals. Historically strong labor market a high proportion of Americans starting a business coexists with the highest inflation since the early 1980s and soaring energy costs.

In the poll, the Americans cited soaring food, gasoline and housing prices as the main problem ahead of the elections. In particular, fuel costs have long been correlated with approval assessment people in the White House. While the prices at the pump have dropped from record levels in Junethey are still almost 40 cents a gallon higher than a year ago for regular fuel.

One economic indicator predicts greater than average losses for the Democratic Party, Goldman Sachs analysts recently wrote. Real disposable personal income – that is, the amount of money people have left behind after taxation – has fallen sharply this year.

“It turns out that the headline CPI and gas prices are roughly equal in terms of their statistical significance to the mid-term election results, but they are not as strong a predictor of election results as real disposable income growth, which has declined more over the past year than in any mid-term elections one year after the start of data collection, ”the investment bank said in the report.

Real wages have also fallen since last year as prices are rising faster than workers’ wages.

Impact on stocks?

Regardless of the direction in which the vote shifts, history shows that one outcome is fairly certain: stocks are likely to go up.

“Markets have historically performed well in the year after their mid term,” LPL Financial strategists wrote on Monday. “In fact, they were higher 18 of the 18 times the following year, starting in 1950, with nearly identical historical phrases for Democratic and Republican presidents.

Financial markets also like a divided government, as the chances of passing wide-ranging laws drastically diminish as opposing parties share power. And if the pollsters ‘predictions come true and the Republicans take control of one or both houses of Congress, it could cool, if not freeze, the Democrats’ legislative agenda.

Some analysts see the path for limited regulation in areas that both sides agree on, such as stopping tech companies, strengthening antitrust enforcement, and regulating cryptocurrencies. However, in the case of a divided Congress, Wall Street analysts believe that Republicans would focus on supervisory hearings and measures on social issues such as ab*rtion, public education, and transgender women in sports, rather than legislation that could reasonably change the economy.

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“Republicans in the House of Republican will likely focus on” passing bills “that emphasize the differences between Republicans and Democrats with little intention or expectation that they will defeat a Democratic hypocrite in the Senate or be signed by President Biden.” – Benjamin Salisbury, Analyst at Height Securities, he said in a research note this week.

Salisbury noted that because Congress will have to pass a law raising the debt limit early next year, there could be a clash over the federal debt limit. This could give the Republican-controlled House an influence to demand concessions on party priorities, including increasing military spending, border wall financing, elimination federal regulations and the permanent introduction of the Trump-era tax cuts and employment law.

Even so, despite Republican opposition to the recent Democratic victories, including massive spending on domestic infrastructure and bolstering the IRS’s ability to prosecute tax fraud, “the potential 180-degree return in 2023 is extremely low due to senate obstruction and a president’s veto,” he said.

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A legislative stalemate in Washington would force the Biden administration to pursue its priorities through staff appointed in the first two years. These include the democratic majority in the Federal Trade Commission and the National Council on Labor Relations, as well as the appointment by Mr. Biden Rohit Chopra to head the Consumer Protection Bureau.

Overall, these regulators are likely to continue the administration’s pro-consumer agenda by taking a firm stance on mergers of businesses, banks and regulation of financial products such as loans buy now, pay later and cryptocurrencies, according to Cowen analyst Jaret Seiberg.

“There is nothing the Republican majority on Capitol Hill to block expected increases in banks’ capital requirements, tightening consumer finance rules, changes in housing policy, oversight of cryptographic rules or SEC for reporting on climate change, SPAC or market structure,” he said in a research note .

Seiberg expects CFPB to push for lower credit card and overdraft fees and reimburse consumers defrauded in Zelle payment scams.

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