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A Blue Wave Reshapes Washington as Divided Government Deflates the War Premium

By ariachiang

2026-11-05

The U.S. midterm elections have delivered a decisive verdict, with Democrats outperforming expectations and seizing control of Congress, setting up a divided government from January. Over the past two years, sweeping policy shifts from the Trump administration, unchecked by a Republican-controlled Congress, repeatedly jolted global markets, from tariffs to the Iran war. Policy itself became the dominant source of volatility. The market reaction after the vote captures this structural shift clearly: the Dow jumped 3%, Treasury yields fell, and oil slumped. Investors were not betting on any particular new policy, but on fewer policy shocks altogether. The key variable steering the U.S. macro outlook is shifting from the will of a single governing party to the bargaining and friction between the White House and Congress.

Two forces are driving this repricing, one fiscal and one geopolitical. On the fiscal side, JPMorgan Asset Management sees a low likelihood of a new large-scale stimulus package over the next two years given divided control. Markets read this as easing concerns about Treasury supply, and the 10-year yield slipped back toward 4.9%, while gold reclaimed the $4,000 an ounce level. On the geopolitical side, the cost of living and the Iran war that began in late February were the main sources of voter discontent, and the rebuke to the president’s party raised the odds that the White House will seek an exit from the war, sending Brent crude down nearly 9%. Opinion remains divided, however. Optimists see gridlock as a stabilizer that will curb extreme policy outcomes. Skeptics note that Trump keeps his veto and Democrats lack filibuster-proof or veto-proof majorities, so Congress cannot end the war outright. There is also concern that tighter Democratic regulation could slow the pace of data center construction, a new headwind for the AI investment cycle, and analysts broadly agree it is unclear whether the drop in yields will last.

Over the next one to three months, attention will center on federal funding negotiations and U.S.-Iran diplomacy. Divided government also raises the risk of funding standoffs and shutdowns, and with shipping risks around the Strait of Hormuz still unresolved, further downside in oil depends on whether a ceasefire actually materializes. Over a six- to twelve-month horizon, Democrats are expected to focus on cost-of-living measures and reversing Trump’s tariffs, which could loosen trade policy, though every step will run into the presidential veto, turning policy from a one-directional sprint into a prolonged tug of war. The main reversal risks are a diplomatic breakdown that widens the conflict to regional oil infrastructure, or an escalating standoff that leads to an extended shutdown, either of which could quickly rebuild energy and fiscal risk premia and undo the post-election calm.

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