A surprise retention by the Democrats of both the House and the Senate could be seen as a dollar positive for 2023. The administration would have more power to meet a recession with a fiscal response. This would potentially make more difficult the Fed’s objective of bringing inflation back to 2%.

Markets would perceive this as being the lower growth and heightened political meddling outcome, which would tend to present a downside risk for equity markets relative to the baseline. For bonds, one question is how inflation might be impacted, with risks that the elevation of climate-focused measures could result in higher inflation, at least in the short term. This could dominate the perception of a lower growth outlook, resulting in higher bond yields than otherwise would be the case (although they would still fall in 2023 once the cycle has turned). That said, there is also a route for bigger spending from a Democratic-controlled administration, bolstering growth and the supply of bonds. That could in turn ultimately skew the risk towards higher market rates on a more medium-term outlook.

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