A financial market rally tied to the Republican takeover of Congress got choked off in just a few hours Wednesday, sending stocks mostly lower and trimming back gains in bonds and the dollar.
Traders and analysts said the markets are worried that a Republican Congress and a Democratic administration could end up at odds and create a legislative stalemate."Gridlock is not going to be good for the market," Ronald J. Menello of George Harry Michael Inc., said from his trading post at the American Stock Exchange. "I think the Republicans getting a stronger hand is going to be viewed positively in the beginning. But once reality sets in, the thinking might be there could be gridlock for a while."
Investors like the fact that the GOP generally favors less government and lower taxes, which tend to stimulate business. The doubts are that this will really happen.
Wednesday morning, prices jumped sharply immediately after trading opened but fell back in a couple of hours. During the lunch hour, the Dow Jones industrial average was down 6.39 points to 3,824.35. It had been more than 30 points higher just after the 9:30 a.m. EST open.
The price of the closely watched 301/4-year U.S. Treasury bond was up 7-32 point, or $2.19 per $1,000 invested. It had been up nearly one point earlier Wednesday.
Likewise the dollar rose against the Japanese yen and German mark compared to Tuesday, but then leveled off and started inching downward.
Hugh Johnson, chief investment officer at First Albany Corp., a brokerage firm based in Albany, N.Y., said reaction to the Republican gains will be dulled somewhat by uncertainty about the GOP lawmakers' agenda.
There is concern that GOP tax-cut initiatives, given a Democrat in the White House, would not be met with corresponding spending cuts and might push the deficit higher. A ballooning deficit would hurt bond prices due to the increased borrowing, he said.
Stocks might then follow bond prices down.
"I don't think it's going to be either Republicans or Democrats getting their own way. I think they're both getting a message to get things done. I think there will be some compromises," said Sung Won Sohn, chief economist at Norwest Corp., a banking company in Minneapolis.
He added: "In the short run there will be some euphoria, which may or may not pan out, of course, in the long run."
The dollar is another possible beneficiary of the Republican gains. The currency has fallen through much of the year against key foreign currencies.
But Randolph Donney, director of research at Pegasus Econometric Group in New York, warned that only a small number of the factors affecting the dollar have to do directly with whether Republicans or Democrats control Congress.
"The major issues for the dollar are, one, trade flows, two, capital flows, three, which I would say is related to capital flows, the direction of bond prices," he said.