What many predicted to be a red wave is now looking more like a toss-up, and investors are mulling what a divided Congress could mean for markets. 

"A split Congress comes with its pros and cons," said Brian Overby, senior markets strategist at Ally Invest. "Most investors appreciate the checks and balances, but if a recession sets in down the line, stimulus may be harder to pass." 

In other words, many investors appreciate when Congress is split because it reduces the chance of big, market-moving legislation, but if a recession comes and lawmakers can't act due to gridlock, markets won't like that either. 

If a recession strikes in 2024, Overby added, "fiscal support will not come about as easily, which would make any recovery slower. Considering that point, it would take bipartisanship in Congress if stimulus is needed to jump-start the economy."

Indeed, this is the exact scenario that some investors are anticipating. 

"This is a short-term side show, whichever way it goes, because we are headed for a massive recession," said Michael Lee, analyst and founder of Michael Lee Strategy, referring to the midterm results. 

However, Lee contends that a split Congress is still the best case scenario, because he believes fiscal stimulus is the "key driver of inflation," and that gridlock means Congress won't be able to pump any more money into the economy. 

Inflation also has to come down to give the Federal Reserve leeway to lower rates to stimulate the economy if needed, he added.

"The problem we're in right now is that if the economy contracts 12 months from now, and inflation is still at 6-7 percent, the Fed won't be able to lower rates. They'll have to continue raising rates." 

Whether fiscal stimulus is causing inflation or not, congressional inaction could bring uncertainty in the form of stalled negotiations around the debt ceiling — harkening back to the strained political climate of the first Obama term. 

"While we don't expect to make major changes to our underlying fiscal policy assumptions, the risks for a debt limit crisis or government shutdowns that roil financial markets and weigh on economic growth will increase," wrote Nancy Vanden Houten, lead economist at Oxford Economics, in a research note. 

For now, at least, markets are feeling the short-term uncertainty. The Dow Jones Industrial plunged more than 500 points Wednesday, and the S&P 500 and Nasdaq Composite both fell around 2 percent as states across the U.S. continued to count votes. 

Adding to the volatility, the latest consumer price index is due out Thursday morning, the results of which could factor into future Federal Reserve rate hike decisions.