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Investors hope the split between Republicans and Democrats controlling Congress will open up opportunities to pick new winners and losers because some government policies will be harder to predict.
In the run-up to Tuesday's congressional elections, investors were dumping or buying all kinds of unrelated stocks at once. 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.
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.
The October sell-off was driven by macroeconomic concerns tied to the Federal Reserve, tariffs, and inflation — and hit active fund managers badly. Large-cap active mutual fund managers posted their worst results versus their benchmark since September 2011, according to Bank of America data.
More conflict in policy decisions could mean those factors drive stocks more than macroeconomic developments.
For instance, investors are bidding up sand and gravel suppliers Martin Marietta Materials and Vulcan Materials on the hope that bipartisan support for infrastructure spending can move forward. But ValueWorks founder Charles Lemonides said he is trimming his stake in the stocks as they begin to reflect too much optimism.
"We think there is a lot of opportunity for people who are willing to do the hard work of investing, which is find individual investments that make sense," said Lemonides.
Macro forces might be less relevant than assumed in the short run. The meeting expected at the end of the month between Trump and Chinese President Xi Jinping could yield hopeful words but no firm commitments to resolve trade issues.
The Federal Reserve could raise rates as expected in December while striking a tone that keeps markets calm. So long as markets focus on more parochial issues instead of trade and monetary policy the implications for stocks could be positive going into next year, investors said.
Policymakers, even those in the same party, could be so at odds that they make no policy changes. Republicans who have controlled the White House and Congress since January 2017 surprised investors by failing to replace the Affordable Care Act even though it was a campaign promise.
That makes oddsmaking hard now on a range of issues, from repealing a medical device tax to passing a budget or loosening regulations on banks. Each event could matter at the sector level, but are not likely to determine the course of the market overall.
Additionally, as tariffs start to bite companies and industries, stock and sector picks take on new relevance.