The market has not priced in the chances of Democrats taking both houses of Congress this year, but the scenario is growing more likely due to two words: Donald Trump, policy analyst Brian Gardner said Wednesday.
Trump's recent failure to clearly disavow a prominent white supremacist's endorsement has made Hillary Clinton the front-runner in a likely general election between the two, Gardner told CNBC's "Squawk on the Street."
The analyst for the financial services firm Keefe, Bruyette & Woods was referring to former Ku Klux Klan leader David Duke's endorsement of Trump's campaign. Rather than disavowing him in a widely cited interview on CNN, Trump said he did not know anything about Duke. He later blamed a faulty earpiece.
"I think he just gave Hillary Clinton talking points and an ability to energize the base of the Democratic Party in a way that she never could have done without those comments," he said.
Neither Trump nor Clinton has secured their respective party's nomination, but both candidates cemented their leads on Super Tuesday.
Currently, investors are betting on further gridlock in Washington on the assumption that Democrats will at best take the Senate and Republicans will keep their majority in the House.
"They have to be careful. I think the risk of a Clinton win is that Republicans go into meltdown," Gardner said.
He raised the prospect of a contested Republican National Convention, in which no candidate has the required delegates to lock down the party's nomination.
"If it goes that route and it gets really ugly, it could fracture a party that's already fractured," he added.
But with investors having entered the year expecting shocks from China and the petroleum sector, the election is not the scariest thing they are grappling with, said Steven Wieting, global chief investment strategist at Citi Private Bank.
"This is not even a focus. We'll be focusing on Brexit before we're focusing really on the U.S. election and whether it can really make a difference for the U.S. economy," he told CNBC's "Squawk Box," referring to this summer's referendum on whether Britain will leave the European Union.
The market will start paying attention to politics if the extremes of both parties, including Vermont Sen. Bernie Sanders, a democratic socialist, make it to the general election, he said.
Guggenheim Partners senior policy analyst Chris Krueger said one could theoretically "paint a pretty bullish scenario" that includes tax and regulatory reform if Trump were elected president, Republicans held control of Congress, and a conservative judge were appointed to a vacant seat on the Supreme Court.
But there is a bearish flip side to that scenario, he said.
"The problem with a President Trump is just the sheer unpredictability and volatility that would come with it," Krueger told "Squawk on the Street."
If Clinton were president and the House remained Republican, Washington would probably continue to govern by crisis and face the fiscal cliff once again, Krueger said.
There is some belief among investors that Trump would delegate responsibility well, and not be so rash in his decisions if he were to reach the Oval Office, said Art Cashin, UBS' director of floor operations at the New York Stock Exchange.
However, Trump's stance on China creates risk, Cashin said. Trump has said he would threaten to impose a 45 percent tariff on China in negotiations with the country.
"If he's going to call them a currency manipulator and possibly put up tariffs and things like that, that would move the market dramatically," he told "Squawk Alley."
Gardner said he is sympathetic to Trump's desire to "shake things up," but agreed his presidency could increase market volatility.
"His trade rhetoric is highly protectionist and threatens to tear apart the global economic system," Gardner said. "I start looking at consumer and retail because it is a threat to the supply chain for global trade."
From a strictly political standpoint, Trump is set up to fail in the White House, Gardner said.
"He has an eighth-grade level of understanding of basic civics," he said. "I think in order to be effective, you have to understand how the government works, and how Congress and the presidency interact with each other. I don't think he has that."