Red queen

US elections: A U.S. election upset could defeat the promise of compromise. A Tea Party conservative’s win in Delaware’s Republican primary for U.S. Senate serves warning to the party’s moderates. It also means if President Barack Obama shifts to the center next year, he may find no one there.

Elections are typically good for investors when they loosen one party’s stranglehold on power. The S&P 500 historically has returned an average of 13 per cent in the six months after a midterm election and 17 per cent in the 12 months after – all above average returns for corresponding non-election periods, according to Deutsche Bank. And, generally, the sitting president’s party loses congressional seats. That makes it much harder to push through legislation that hits businesses and investors.

But gridlock doesn’t favor a country with big debt problems. After Republicans took both houses of Congress in the landslide 1994 midterms, they eventually melded minds with President Bill Clinton to deliver solutions on taxes, budget and regulation. Markets and the economy boomed with budgets balanced and investment taxes slashed.

Some are hoping for a similar dynamic this November. Republicans are predicted to score huge gains. And Obama’s budget commission could lay the groundwork for a “grand compromise” on taxes and spending. But conservative Christine O’Donnell’s defeat of Delaware moderate Mike Castle, the state’s congressman since 1993, may pull remaining GOP centrists further right and impede dealings with Obama.

The political calculus is curious. Conservative Republicans dumped Castle even though he seemed to have a far better chance of winning the seat currently held by a Democrat. It could alter the positions of remaining Republican moderates like Maine’s Olympia Snowe and Susan Collins, who will hope to avoid future primary challenges of the sort that also knocked out GOP Senate incumbents in Utah and Alaska this summer. Clinton had a willing partner when he made legislative deals in the 1990s. Today’s Republicans may not afford Obama the same opportunity.