NEW YORK (Reuters) - Investors hope the split between Republicans and Democrats controlling the U.S. Congress will open up opportunities to pick new winners and losers because some government policies will be harder to predict.
Correlations between stocks and sectors were high in the run-up to Tuesday’s congressional elections, meaning investors have been either dumping or buying all kinds of unrelated stocks at once. Some funds have been damaged in what is a tough market to be a stock picker.
Now, with voters giving Democrats control of the House of Representatives and Republicans retaining their Senate majority, fund managers can take opposite sides of various policy bets.
These might include whether financials will benefit from deregulation even with stricter House oversight, if healthcare will face more policy proposals aimed at restraining costs, and whether military spending will get caught in a tussle between the two parties.
“If we are in a generally volatile environment but one that’s not overly negative, in other words a choppy market as opposed to a bear market, I think that’s an environment where correlations can fall,” said Evan Brown, head of macro asset allocation strategy at UBS AG’s asset management business.
“There’s potential for sector out-performance and under-performance as a result of the election.”
President Donald Trump told reporters on Wednesday that he was willing to work with Democrats on some policy priorities.
Issues that could gather bipartisan support include a package to improve infrastructure, protections against prescription drug price increases and a push to rebalance trade with China.
Stocks rallied on Wednesday, but one Cboe S&P 500 Implied Correlation Index .ICJ
