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U.S. stocks recorded their worst decline yesterday, a day after any election in a decade, according to Dow Jones Market Data, as the race for control of Congress is still unclear. The stock market typically performs well under a divided government, which is the most likely scenario with Republicans expected to take control of the House and the Senate still up for grabs.

The Republican wave failed to sweep through midterm elections. Per the latest reports, the Republican party remained close to winning enough seats to gain a majority in the House, but the control of the Senate remained up for grabs in three states. Either party could secure a Senate majority with wins in both Nevada and Arizona — where the races were too early to call.
Georgia's U.S. Senate race, meanwhile, is heading to a runoff in early December, with neither major candidate on track to win a majority of votes.

As of late Nov 9, both House and Senate control remains in the balance. Democrats managed to flip a crucial Senate seat, with John Fetterman beating Mehmet Oz in the Pennsylvania race.

Some market analysts are signaling that a political gridlock by Republicans may be a positive for Wall Street and the U.S. economy. The control of even one chamber of Congress by Republicans would check President Joe Biden's legislative push for more business regulations and help demand spending cuts. As a result, shares in healthcare, energy, technology, and defense sectors could see more volatility in the weeks ahead.

This is because a Republican victory is seen as eliminating either current regulations, like in the energy sector, or potential future regulations, like in the pharmaceutical sector. On the other hand, a surprise victory for Democrats could raise concerns about the technology sector regulation as well as budget spending that could add to already-high inflation, according to market participants. Democrats are chasing a bill to lower prescription drug prices.

ETFs in Focus

Energy Select Sector SPDR (XLE - Free Report)

Energy Select Sector SPDR is the largest and the most popular ETF in the energy space, with AUM of $44.6 billion. It offers exposure to the broad energy space and follows the Energy Select Sector Index. Energy Select Sector SPDR holds 23 securities in its basket, with a heavy concentration on the top two firms.

Energy Select Sector SPDR charges 10 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

iShares U.S. Pharmaceuticals ETF (IHE - Free Report)

iShares U.S. Pharmaceuticals ETF provides exposure to 41 U.S. companies that manufacture prescription or over-the-counter drugs or vaccines by tracking the Dow Jones U.S. Select Pharmaceuticals Index. It is heavily concentrated on the top two firms with at least 20% share each, suggesting heavy concentration.

iShares U.S. Pharmaceuticals ETF has $412.8 million in AUM and charges 39 bps in fees and expenses. Volume is light as it exchanges about 8,000 shares a day. The fund carries a Zacks ETF Rank #3 (Hold) and has a High risk outlook

iShares U.S. Aerospace & Defense ETF (ITA - Free Report)

iShares U.S. Aerospace & Defense ETF provides exposure to U.S. companies that manufacture commercial and military aircraft, and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index.

iShares U.S. Aerospace & Defense ETF holds 35 stocks in its basket with AUM of $4.1 billion and an expense ratio of 0.39%. The product trades in an average daily volume of around 438,000 shares. iShares U.S. Aerospace & Defense ETF has a Zacks ETF Rank #3 with a Medium risk outlook.

Vanguard Information Technology ETF (VGT - Free Report)

Vanguard Information Technology ETF manages about $38.4 billion in its asset base and provides exposure to 371 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Technology Hardware, Storage & Peripheral takes the top spot at 23.7%, while systems software, semiconductors and application software round off the top three with double-digit exposure each.

Vanguard Information Technology ETF has an expense ratio of 0.10%, while volume is solid at nearly 876,000 shares.

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