New market risk: A Democratic election sweep

In a crazy election season, Wall Street has found comfort in the notion of political gridlock, figuring that no matter which candidate wins the White House, the checks and balances of divided government would keep the most extreme policies far from the fast track to becoming law.

But after the second presidential debate and more signs Democrat Hillary Clinton is stretching her lead on Republican Donald Trump, at least one Wall Street pro says there’s a long-shot chance that the Democrats can retain the White House and might also have a shot at recapturing both the Senate and House.

If that election outcome were to occur, it would mean Hillary Clinton would have free rein to push her agenda of higher taxes on high-income Americans and investors, more regulation of banks and other businesses, a focus on clean energy and less onerous drug pricing.

“The market isn’t priced for complete Democratic control,” Dan Clifton, a Washington policy strategist at Strategas Research Partners, warned clients Monday in a post-presidential debate note, although he believes the GOP will retain the House. Still, over the weekend, the betting odds of the Republicans keeping the House fell from 98% to 77%. The Senate has always been up for grabs.

Adding to fears of full Democratic control, Republican House Speaker Paul Ryan reiterated similar fears Monday when he told fellow GOP leaders that his goal now in the runup to the election is not to support Trump but to make sure Republicans hang on to their power in Congress, especially the House.

“If we are wrong and a wave is building against House Republicans, the largest market impact could be the pulling forward of income as investors anticipate 2017 tax increases,” Clifton says, noting that investors fearing higher taxes in 2017 and beyond might sell some securities ahead of the tax increase.

“We could also see (stock market) pressure building on pharma (drug prices), financials (bank regulations) and oil companies (intangible drilling credit tax increase and climate change accounting)," he says.