Monday, November 12, 2018

Midterm Elections and the Stock Market

  • Dollar
  • Stocks

In US political news overnight, the House of Representatives flipped to the control of the center-left Democrats while US President Donald Trump's Republicans retained control over the Senate. The election result fits historic patterns where the standing President generally faces losses in midterms as voters check his power, though the victory in the House seemed to fall short of the "blue wave" Democrats were hoping for.

To put things in perspective, in 2010 the Republicans took 63 seats when Barack Obama was President, a large victory in comparison to the 23 seats the Democrats picked up last night. Mid-term elections are often viewed as a referendum on the party that holds power, with the minority party typically making significant gains. But with these limited gains, the Democrats will hardly be able to stifle any policy which supports the economy.

But what could all this mean for the stock market?

On Wall Street, equities remain supported with the Dow Jones Industrial Average ending up 0.7, and both the S&P 500 and Nasdaq Composite gaining some ground, suggesting this outcome is positive for risk since the gridlock outcome supports Trump’s mandate and a higher probability of more fiscal stimulus.

So it appears that this gridlock scenario will not negatively affect equities, at least not immediately, and especially not the highest-growth stocks that can keep putting up terrific numbers even after a slowdown in the broader economy. For instance, tech giants like Amazon and Google, or the big semiconductor names like Qualcomm and Broadcom, which are tied to the roll-out of 5G wireless technology, not to the broader economy.

Retail stocks, however, might suffer now that the Democrats landed a victory in Congress, as Trump’s tax cuts might now be blocked. But this suffering will not start anytime soon because we are after all approaching the holiday shopping season. In addition, many retailers reported their best numbers in a decade this past summer, mostly thanks to Trump’s tax cuts, and typically big summer spending leads into big holiday spending.

Bottom line, gridlock or not, congressional Democrats will likely not have enough votes to stop Trump’s trade war with China or change the Federal Reserve’s plan for raising interest rates. And even though many experts predict an “economic slowdown” with the Democrats now owning one of the houses of Congress, the highly probable scenario is:

  • President’s tariff’s rise to 25% next year.
  • The Fed tightens 4 more times to ensure that there’s less inflation.
  • High growth stocks keep roaring pushing the Dow Jones higher.
  • Consumers keep spending as we approach the holiday season.
  • Long-term investors come back out of the woodwork following the recent market correction to buy secular plays.