After the midterms: Who wins, who loses, and gearing up for gridlock
Author: Kevin McCreadie
November 9, 2018
Investors love certainty and Tuesday’s U.S. midterm elections delivered on a much-anticipated outcome: Congressional gridlock, enabling a system of checks and balances on the levers of power while ensuring there will be no major shifts in the Republican economic agenda over the next two years.
By the time the final votes were tallied this week, the Democrats had wrested control of the House of Representatives, while the GOP had tightened its grip on the Senate.
Markets rallied on the results and there is momentum to continue in positive territory throughout November and December, as midterm jitters fade and markets get a jolt from seasonal factors. In fact, since 1946, markets have risen more than 15% in the 12 months following a midterm election, according to Forbes. And this President is intent on keeping the economy humming as he eyes the beginning of the next Presidential election cycle.
Here are some issues we’ll be tracking as we consider the impact of the midterms over the next several months:
The debt ceiling is often an ongoing political wrangle about the appropriate level of government spending and its impact on both the national debt and deficit, and typically is raised without any pushback. However, this time around, Democrats could get aggressive, demanding more spend around items like Medicare and use the debt ceiling as a weapon, potentially shutting down government and creating more noise.
Corporations have already begun to warn of the impact of tariffs on input costs and with crucial meetings between President Donald Trump and Chinese President Xi on the horizon, an increase in tariffs could take a chunk out of S&P profits next year. A tight labour market could also take a toll. Overall, we expect equity markets will grind higher, but this will depend upon how fast the Fed moves.
We believe that if the Fed maintains an aggressive posture on controlling a red hot economy, you could see Trump get louder in his criticism of the Fed’s rate-hiking strategy. Markets don’t like politicians getting involved in central bank policy.
Whether it’s going after Trump’s taxes, or his campaign ties to Russia in 2016, any talk of impeachment proceedings will represent headline risk, although such efforts would most likely be thwarted by a Republican-led Senate.
Potential winners: Infrastructure, healthcare sectors
If there are two areas where a divided Congress might find common ground it’s in controlling drug prices and increasing infrastructure spending. The Democrats have been pushing strongly for a hard cap on drug pricing, and the President agrees pricing is too high.
The President has also talked about an infrastructure bill, and the Democrats are keen to see a bill, although there’s yet little agreement on its size or implementation. But progress on these fronts would be positively reflected in both health care, and industrial sectors of the market.
Potential losers: Financial and technology sectors
There’s been no love affair between Trump and the tech sector. We could see a move by the administration to try and regulate tech through anti-trust measures, and the administration has been known to use that stick.
In the U.S.’s financial sector, one wild card is what happens with a new chairman of the House Finance Committee who has also shown no love for the financial services industry and could try to push fiduciary standards that had been watered down by Trump back to the table.
Kevin McCreadie is President and Chief Investment Officer at AGF Investments Inc. He is a regular contributor to AGF Perspectives.
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