Stifel Chief Washington Policy Strategist Brian Gardner joins Yahoo Finance to discuss the midterm elections and what a split Congress means for markets.

Video Transcript

- Let's move on to another big story. The balance of the House and the Senate are up in the air heading into November's midterm elections. We're joined now by Stifel chief Washington policy strategist Brian Gardner for the latest from the nation's capital. And Brian, lots of talk about what's going to happen in the House, what's going to happen in the Senate. Tell us what you think is the most likely scenario at this point.

BRIAN GARDNER: I think the most likely scenario is a Republican House and a Democratic Senate. Clearly, with still several weeks to go, things can change. And Republicans still have a shot at picking up the Senate. And if things deteriorated further for Republicans, Democrats could pick up the House. But the most likely scenario is a split Congress. Republican House, Democratic Senate, and of course a Democratic President.

- And that would be a monumental upset given where things were a few months ago. It was looking very bleak for Democrats. Probably comes down to a handful of races in the Senate. What are they?

BRIAN GARDNER: I look about nine current Democratic seats. Arizona, Nevada, Georgia, New Hampshire. Republicans are trying to defend about five seats, especially a couple where they have some incumbents retiring in Ohio and Pennsylvania, for example. North Carolina. So those are the key races. I mean, over the last couple of months, the analogy I like to use, unfortunately as a Yankee fan, is it looks a lot like the pennant race in the American League East, where the Yankees had this seemingly insurmountable lead and have almost blown it. I do think that both the Yankees and Republicans, especially in the House, are going to get across the finish line and finish first.

But, yeah a couple of months ago, it looked like it was a slam dunk, especially in the House. I was always a little skeptical about the Senate. I think the Senate's different. If people remember back to 2018, really great Democratic year. They pick up 40 seats. They flip the House. They lost two Senate seats that year. So it's not unprecedented that the House goes one way, the Senate goes a different way.

- And if we do see that play out, talk to us just about the policy ramifications of this because certainly will be different than what we've seen play out over the last two years.

BRIAN GARDNER: So there are a couple of factors in play here. One is that the Republican Party continues to evolve. It's less the conservative free market capitalist party that it used to be. It's more of a populist party now. So big business is going to have a more contentious relationship. Small business will be fine. But it's going to be a lot of pushback against big businesses.

And then there's the issue of Republicans cooperating with the White House and Democrats on a host of must-do pieces of legislation, debt ceiling, government funded, those type of items. That's complicated by the Freedom Caucus, which is a group of Republican lawmakers in the House that vote as a bloc. And the smaller that the margin is for Republicans, the more unmanageable the House becomes. So we're probably going in for a time where we're going to be seeing a higher risk of government shutdowns.

And while I don't think there's going to be a default on the government debt-- I think that that's a very remote possibility-- the drama surrounding that is going to increase I think, especially with a smaller Republican majority because then Republican leaders then have to turn to Democrats in order to secure votes that keep the government open, raise the debt ceiling, avoid defaults, that sort of thing. And it's going to just become politically more chaotic.

- And Democrats better wrap up that January 6 investigation. Republicans take the House, that thing is over. As far as the markets are concerned, we long hear they want divided government. Is that the case here?

BRIAN GARDNER: I don't buy into that quite as much as some people do. I do think markets outperform in years of divided government. But it's by such an insignificant amount I consider it immaterial. So I know what the narrative is. I think over history, it doesn't quite play out quite the way people think it does.

- While we have you, we've got to ask you about the rail strike because the fact that that's looming, there's a clear economic risk. The estimates out there saying that it could cost $2 billion a day. Talk about the risk that this potentially poses to the Biden administration and Democrats and the potential ramifications of this.

BRIAN GARDNER: So the Biden administration has had a couple of good months politically. They got some legislation through Congress. Gas prices have been coming down. There have been some tailwinds, or at least the headwinds subsided. All of a sudden, if you have a rail strike and supply chain issues start to exacerbate again, it leaks into some commuter rail issues disruptive to work. I think that stops it in its tracks, excuse the pun, and does pretty grave damage to Democratic prospects, depending of course on how long that strike would last. But it is a big risk for the Biden administration and Democrats more generally.

- And that's why he's personally involved. Massive supply chain issues ahead of the holiday shopping season would be devastating. All right. Stifel chief Washington policy strategist and "Potomac Perspective" podcast host Brian Gardner. Good to see you, sir. Thanks.