Midterms and the Market

Midterm Election - House Wins.PNG

The Democrats successfully retook the House last night in the U.S. Midterms. The question is, “What does that mean for your portfolio?”

With a divided Congress and polarization at extremes, the Trump/Republican legislative agenda will likely come to a screeching halt. The Democrats do not have enough control to really “undo” anything, but they can stand in the way of further moves by Trump. Further, the Democrats have already said if they were to come back in power, they would launch a series of inquiries into Trump’s scandal-filled administration and campaign. The Mueller investigation is still outstanding, so I expect an escalation in the intensity of that process. Impeachment calls could come at some point, but I don’t believe it will go anywhere now that the Senate is firmly Republican.

So, we are left with a fierce gridlock for the next two years. Trump has the option to seek some sort of bipartisan deal maybe on infrastructure or healthcare, but it is hard to see that happening given his divisive stance to date. The most likely scenario, in my opinion, is that Trump hardens his stance even more while eyeing the 2020 Presidential election in an attempt to appeal to his loyal base. Similarly, the Democrats will likely do everything they can to show their contrasts on issues from immigration to climate change to engage their base. The next election could force our nation to “choose sides” rather than finding common ground. And that, I personally find to be very sad.

Regarding the market, with political gridlock, investors should be more focused on fundamentals. There are numerous headwinds which could make the environment challenging. For example, earnings and profit margins have helped sustain this rally. But rising interest rates and wages suggest we could have reached “peak” earnings last year. Markets look forward, so disappointing earnings will not be welcome. Globally, other regional markets are struggling which will make it harder for the U.S. to sustain positive momentum.

Trade tensions are still a focus as the Democratic win will do little to influence Trump’s trade policy. However, my guess is that his stance will soften on China as we get closer to the 2020 election. Trump will need a political win to stay in favor with his base to vie for re-election, and a China deal could fit the bill. Whether or not it will actually be a good deal may be debatable, but we’ll be told it’s good. : )

My expectations for the broad stock market for the next two years are decidedly bearish. I expect the market to be range bound at best and we could see a significant downturn if impeachment calls find merit or fundamentals decline significantly. A “defensive” allocation makes sense based on my research to seek out attractive investment alternatives in this volatile time.  

Sources: Bloomberg

  • Created on 07 November 2018.

NewsCharles Freeman