How investors should view the US midterm election results
The expectations were right on cue: Democrats took over the House of Representatives with a comfortable lead and Republicans kept the Senate with an increased majority. Markets are logically only slightly positively moved by the outcome. Beyond the immediate reaction, though, there should be a more bullish backdrop building in the coming year for risk assets.
History says that since 1950, the markets were up every year after midterm elections, including 1987, with its infamous crash. History is not always a good guide, so could this time be different? Hardly. There is a good reason for this consistency: the President wants to get re-elected and, if leaving after his second term, he wants to have someone from his own party elected. The simplest way to do it is to prime the pump. President Trump will not be immune to this desire and will try, by hook or crook, to re-engineer the ‘sugar high’ that the tax cuts created this year. Except that his options will be more limited. With the Democrats running the House, he cannot expect to enact another tax cut. So, what can he do?
He could enact a large infrastructure spend, which the Democrats would vote for (minus his pet ‘wall’). There’s a rub, though. It will take years to build infrastructure and years before the impact is felt by the economy and voters. Trump does not have that long. The other option, perhaps less palatable but much more effective, would be to settle the US-China trade dispute. This would remove the overhang on many sectors (industry and agriculture) as well as financial markets, which have been worried sick about it. It will certainly not be easy as the Chinese have no wish to be seen to capitulate before the US, but Trump will doubtless be masterly at portraying any deal as a victory for the US, irrespective of the details. The President may already be thinking that way, as he made some noises about a China agreement in the last 10 days and there is an upcoming summit with President Xi at the end of this month which could kick-start the real negotiations.
The campaign also threw up a couple of areas of concern in the electorate: immigration and healthcare. President Trump may not get much traction on his anti-immigration views with Democrats, but could get bi-partisan support for a bill to kerb drug prices, especially some biotech drugs that pharma companies have bought with an eye to a fat margin. It is likely that these companies will be under the cosh, although all other health services (hospitals, medical equipment, etc) will remain unscathed as they are not in the public eye.
There could be spoilers though. If Democrats choose to use the new-found House majority to try and impeach the President, he will fight back in his own inimitable way and the meaningful deals in an otherwise gridlocked political system could fall by the wayside. Nancy Pelosi, the septuagenarian leader of the House Democrats, probably knows better than to start a political battle which can only help Trump’s re-election, but will she be listened to by the freshman class of new Democrats?
It will be fascinating to watch the political machinery in the next year. Whatever you do, though, don’t be under-invested. The next 12 months could well be true to form and produce good returns.
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. All opinions expressed are subject to change without notice.
Past performance is not a reliable indicator of future performance.
Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. and is provided to clients as part of their service with CGWM. Please click here for the important information.
Find this information useful? Share it with others...
IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.