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Election: Experts don’t expect much impact on markets

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11/07/2018 | 10:51am EDT

On November 6, 2018, Americans went to the polls for the midterm elections. The Democrats won control of the House, while the Republican maintained their hold on the Senate. Widely expected, these results should not have significant market repercussions.

The Midterm elections take place once every four years in November, in the middle of the president’s four year office term. The Democratic Party won the U.S. House thanks to a surge of voter anger and discontent with Donald Trump. However, the Republican Party kept his hold on the Senate.

What is at stake for markets? In a report, Goldman Sachs says it believes the markets were largely priced for this outcome and therefore expect limited effect on market volatility.

“Financial markets care more about fundamentals and policies than politics, with markets showing greater resilience towards political events or rhetoric that produce little action. We believe the midterm result is no exception with a divided government likely to have a larger impact on political sentiment than market performance,” it says, adding: “we think the election outcome is likely to produce few changes in US economic policy relative to what is already reflected in market pricing.”

Nothing like 2016

When it comes to fiscal policy, Goldman sees limited potential for significant changes in fiscal policy. “A divided government is likely to create political gridlock, lowering the probability of further US fiscal stimulus such as a middle class tax cut, while also making it difficult for Democrats to change existing policy.”

Wells Fargo pretty much agrees. It says in a report that it is skeptical the 2018 midterms will match the 2016 election in terms of sweeping macroeconomic implications. “The 2016 election was a watershed election, and it resulted in the first “unified government” (i.e., one party controlling the White House and both chambers of Congress) since 2009-2010 and the first Republican unified government since 2005-2006”, the financial services company said. “Generally speaking, the move from divided government to unified government opens up more possible policy outcomes as one party unites to pass landmark legislation.”

When it comes to the 2018 election, the move from unified government to divided government “is less likely to produce a clear inflection point in the nation’s fiscal policy, as happened in 2016.”
Wells Fargo believes that the tax cuts enacted at the end of last year are unlikely to be repealed or significantly expanded. In addition, it is also skeptical the stars will align for another discretionary spending increase as large as the one that Congress passed in Q1-2018.

Towards 2020

Another final policy area that could have an impact post-midterms is the debate over the USMCA, the deal negotiated to update and replace portions of NAFTA. “Though the president will likely sign the agreement before year’s end, a vote in the House and Senate is unlikely until 2019.” It believes that a divided government could make this a bit more of rocky process. It notes that one aspect of the trade agreement process that should help is that the process by which trade agreements are voted on in Congress makes it much harder for a determined group of Senators to use procedural measures to indefinitely delay a vote in the upper chamber. This is why its forecast assumes that the NAFTA renegotiation ends with the eventual adaptation of the USMCA.

This morning, the Unicredit strategy team explained that it does not believe in a change in the direction of trade policy or infrastructure. It expects the Democrats to use their control of House committees to overexpose the President and weaken his position for the 2020 presidential election.

The American economy can hardly turn faster, even if we take into account our legendary capacity to adapt. Growth is strong, unemployment is at its lowest and tax policy has boosted activity and allowed the repatriation of war treasures from large companies. If we put all these elements in the left platform of the balance and add to it on the right: cycle of rate hikes, trade tensions, strengthening of the dollar, budgetary consequences of fiscal policy... We can legitimately consider that the best years have passed for Donald Trump, who will probably have more to do to give a positive vision of his balance sheet by 2020. There is also a risk of talking again, regardless of the election, about the American deficit, which will widen to 4.6% of GDP next year according to the work of Congress, with a flourishing economy, therefore, if growth slows down, there is a risk of slippage...

Romain Fournier
© MarketScreener.com 2018
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