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Will the US midterm elections come up Trumps?

21 August 2018

"Since the 1950s, every market correction in midterm years has turned out to be a good buying opportunity."

The US is unusual among democracies in that it has congressional elections every two years. These are due in November this year. For the Senate (the upper chamber of Congress, which comprises 100 Senators), only a third of the seats come up for election, meaning that Senators have at least a six-year tenure. However, the House of Representatives (the lower chamber of Congress with 435 voting members) could theoretically be renewed every two years.

Traditionally, the incumbent president’s party loses quite heavily during the first midterm elections after two years of presidency (which seems to have no bearing on whether the president goes on to be re-elected two years later). The extent of the losses tends to correlate with the president’s popularity ratings. As President Trump has generally had ratings below his predecessors, it is fair to consider whether the losses could be significant and whether this would make any difference to US policy, economic or otherwise.

The current Republican majority in the Senate is skinny (2) whereas in the House it is more comfortable (45). Strangely enough, though, it is the House majority that is more at risk, because all seats are up for election, whereas the Senate seats to be disputed are mostly Democratic-held and hence less likely to produce an upset.

All the same, the current polls would indicate a toss-up for the House majority. It is therefore no surprise that President Trump is trying very hard to produce major ‘wins’ in policy before the midterm elections (summit with North Korea, trade war victory claims, renegotiation of NAFTA, deregulation in banking sector and, of course, tax cuts).

 

What if the Republicans lose?

Were the Republican majority to be overturned in either house, President Trump would find it difficult to work with Congress. 

He has not endeared himself to the Democrats and  may find them unwilling to ‘meet in the middle' on any significant piece of legislation. They may also curtail his executive powers on trade and foreign policy, which have been delegated to the White House but are coming up for renewal late next year.

Also, and perhaps more importantly, they may start the impeachment process which Congress has the power to do. Although the eventual outcome is unlikely to be the President’s removal, the process per se would be a major distraction for Trump and Congress and would likely stall any law-making activities.

 

The midterms and markets

The markets may not always have welcomed President Trump, but, once he was set in with a Republican majority, they approved of the pro-business, tax-slashing, regulation cutting White House and Congress. It is probable that a Democratic majority in the House would seek to limit the impact of the recently-enacted tax cuts. Such a change might rattle market nerves for a while, so the run-up to the midterm elections may be tricky for markets and therefore investors.

Since the 1950s, though, every market correction in midterm years has turned out to be a good buying opportunity for the next three and twelve months.

We see no reason why it should be otherwise this time. World equities will probably follow the US, even if there is unlikely to be any direct impact on other countries from the November US elections.

Historically, midterm years have sideways-moving volatile markets for the first three quarters (so far that pattern is holding true) and a blow-out fourth quarter with good returns for investors. It will be exciting to watch the elections, but equities may have a couple of difficult months along the way.

US midterms senate and house

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.

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.

Photo of Michel Perera

Michel Perera

Chief Investment Officer

Michel is responsible for the investment process at Canaccord Genuity Wealth Management, with a specific focus on asset allocation and stock selection. He also works to maximise the potential of Canaccord Genuity's proprietary and industry-leading stock screening tool, Quest®.

Michel is an experienced investment strategist having spent the past 19 years at JP Morgan Private Bank where he was the Chief Investment Strategist (EMEA) responsible for running investment strategy and overseeing tactical asset allocation decisions for discretionary portfolios within the region.


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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.

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