An election night triumph that gives Democrats control of either the House or Senate would jolt U.S. financial markets and send interest rates higher, money managers and financial analysts said.
Wall Street managers, like most political analysts, are betting that President Clinton will be re-elected and that Republicans will maintain control of Congress, and that view has already been factored into market prices. Yet, Democrats remain within striking distance of taking the House, an outcome that would have a significant market impact, analysts said.The yield on the benchmark 30-year U.S. Treasury bond "could rise 25 to 50 basis points very quickly" said Leslie Alperstein, a senior managing director at HSBC Washington Analysis, which provides political analysis for bank conglomerate HSBC Holdings Plc. "A Democratic takeover in either house isn't a political risk factor reflected in market rates today."
Interviews with money managers, analysts and traders found a widespread view that a Democrat majority in the House or Senate wouldn't be as committed to lowering the deficit or curtailing entitlement spending as are Republicans. In addition, they argued that more liberal committee chairmen would favor tax increases and new business regulations, all of which would be harmful to stocks and bonds.
"There's the expectation that if government remains divided, there are stronger prospects for fiscal restraint and deficit reduction," said John Youngdahl, a senior money market economist at Goldman Sachs Group Inc. "If you change the mix and put Democrats in control, that thought process gets damaged."
A Democratic victory in either the House or the Senate would usher in a new set of committee chairmen with far different, and often more liberal, political priorities than their Republican counterparts.
Wall Street's mantra remains reducing the annual U.S. budget deficit through spending constraints, a platform it believes Republicans will better uphold. Lower deficits lead to lower interest rates, increasing the value of bonds and boosting stock and other financial contract prices.
"I don't think the market will react well to the Democrats winning Congress, and if it's both Houses it's twice as bad," said Charles Henderson, chief investment officer at Chicago Trust Co., with $6 billion in assets. "That scares the bond market because that probably means more spending, and then a little upward pressure in bond yields, and that hurts stocks."
Financial analysts worry that Democratic control of Congress would also decrease the likelihood of entitlement reform, actions designed to slow the rate of growth of programs such as Medicare, Medicaid and Social Security.
Medicare alone is estimated to grow by 10 percent a year for the next 10 years, increasing from 3.7 percent of gross domestic product in 1995 to an estimated 5.9 percent by 2006, according to the CBO.
"If the Republicans lose the House after only two years, they will blame their focus on deficit reduction and Medicare restraint, and they'll have much less of an appetite for another run at the same thing in '97," Goldman's Youngdahl said.
Still, Clinton and members of his administration, including Health and Human Services Secretary Donna Shalala, pledge to work to slow the growth of Medicare in order to keep the program solvent for the next 10 years.