Washington Policy
This time the models did get it mostly right with the Democrats winning a majority in the House of Representatives and the Republicans adding to their Senate majority. So far, the markets seem to like the outcome of the various races. Now the debate across Wall Street is whether or not “gridlock” is good. The extra cushion in the Senate will probably help President Trump as he makes selections to cabinet posts, regulatory agencies, and the courts. The expanded Senate majority is also a significant boost to the Trump deregulatory agenda. On the legislative agenda, Democrats are expected to pursue Congressional investigations, a bill to lower drug prices, and a potential infrastructure bill.
So what happens now?
The immediate focus of the House will be on China trade and increased oversight of the Trump administration. A Democratic house may pursue reversal of some Trump actions, but the chances of any rollbacks passing remain very low. In addition, we do not see any reason these election results will change President Trump’s position on trade issues. This could be a catalyst adding to stock market volatility.
Messaging from the White House
We expect the messages coming out of the White House to focus on the Senate gains (two races have not been called as we write this email) and downplay the takeover of the House. President Trump campaigned heavily for Republican Senate candidates in the final weeks of the election, and the White House will view Senate Republican pickups as vindication of the President’s agenda.
Governors’ races
The split decision on the Congressional level was repeated in gubernatorial races. Democrats had a series of key pickups, but Republicans held a number of key races including important races in Ohio and Florida. This will largely factor into the 2020 presidential election and boost the chances of President Trump keeping his coalition together.
How does this affect the markets?
To some extent, the election results are a sigh of relief to many investors and we think this gives the markets an increased degree of certainty. Historically, the S&P 500 has been higher 12 months later after each of the last 18 mid-term elections but this is no guarantee. While there are still many unknowns (i.e. trade policy, rising interest rates, worry about corporate profits, etc.), the markets will no longer need to worry about the 2018 mid-term elections. We do not think there will be a “straight up” rally to new highs but we continue to have confidence that the bull market continues.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.