A Wall Street investment chief says a divided government is a better outcome for stocks than a ‘blue wave’ — and sees 44% S&P 500 upside from current levels

• Stephen Auth, chief investment officer for equities at Federated Hermes says a divided government will be a “far happier outcome for markets” than a Democratic sweep.
• Auth explained that a divided government will pass a substantial fiscal package while avoiding “growth-killing” tax hikes. 
• He has a long-term price target of 5,000 for the S&P 500 index.
• Auth told clients in a Wednesday email: “While we had no clear political winner last night, we did have a winner: Mr. Market.”
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Leading up to the election, many analysts on Wall Street argued a ‘blue wave’ sweep — where Democrats win control of White House and Congress — would be the best outcome for markets as it would allow for a large fiscal stimulus to get passed.

Such a sweep didn’t come close to happening, but Stephen Auth of Federated Hermes said markets don’t need to worry.

In an email to clients on Wednesday, the chief investment officer said: “We are heading for a divided government. In our view, this is a far happier outcome for markets than the prospect of a Blue Wave.” Polls largely point to Republicans remaining in control of the Senate while Democrats keep control of the House. 

He explained that a divided government will be able to pass a substantial fiscal package while also avoiding “growth-killing tax hikes” that Democrats would have implemented had they won complete control of Congress.

This outcome will be bullish for stocks in 2021, Auth said. His longer-term price target for the S&P 500 index is 5,000—nearly 44% higher from Wednesday’s levels. 

Auth also explained that the outcome of the presidential election is not as critical to policy now that Congress is projected to be split.

“With the Senate apparently remaining in Republican hands, the presidential outcome becomes less key from a forward policy perspective, at least as far as the market is concerned,” he said. 

Read more: Morgan Stanley breaks down why defense stocks are cheap must-buys after the election regardless of who wins — including the top pick it expects to rally 62%

He added that the economic recovery already underway should continue to gain steam once more fiscal stimulus is passed, and this along with Fed policy will boost cyclical stocks.

“The Fed will keep short rates pinned near zero, and with deficits likely to rise in a divided government scenario, the yield curve should steepen somewhat; more good news for financials, a big piece of the value trade, where stocks are cheap,” he said. 

Auth added: “So while we had no clear political winner last night, we did have a winner: Mr. Market.”