Which way for markets? It’s all about the midterms
Americans will cast their vote in the US midterm elections today, and the results will set the tone for stock markets around the world.
All 435 seats in the House of Representatives are up for grabs, while 35 of the 100 Senate seats will be on offer too.
The big picture result will centre around how easily President Donald Trump can enact legislation during the remainder of his term.
Betting markets have suggested that the Democrats will gain control of the House, but Republicans will keep their grip on the Senate. Should that come to pass, it will make Trump’s agenda harder to enact.
Since Trump’s election, the S&P 500 stock market has risen more than 27 per cent. That figure betters the early months of the presidencies of Bill Clinton, Ronald Reagan and George W Bush.
Barack Obama’s numbers are much higher, but stocks then were springing back from the depths of the financial crisis.
Global stocks have struggled in 2018, especially in October, but analysts say if the Republicans hold on to both the House and the Senate, you can expect a return to buying.
The chief strategist at BNP Paribas Fortis, Philipe Gijsels, says that winning both chambers would allow Trump to continue a market-friendly policy, and says it could even see him become a little less hostile to China, producing a bump for international stocks.
The analyst adds that even losing the lower House would only be market neutral, and may even speed up a Trump deal with Beijing.
Gijsels puts the odds of the Republicans losing both houses at just 10 per cent, but concedes that the scenario could see markets dip, with Trump’s lack of domestic power leading him to double down on trade war tactics.
Deutsche Bank says that the issues Americans appear to care about going into the election are health care, trade, and immigration.
If the Republican Party gets full control, we’re likely see a rally in risk assets such as stocks, according to a forecast note from the bank’s researchers last week.
The bank adds that any further fiscal stimulus, such as more tax cuts, would also benefit equities.
Deutsche cautions on the idea that a sweeping Democrat victory would lead to any huge sell-off on stock markets, noting that the rival parties may then work together on a huge infrastructure package.
Edward Park, investment director at UK investment manager Brooks Macdonald says that the importance of the midterms shouldn’t be overplayed by investors.
According to Park, much of recent US politics had been “driven by executive orders rather than legislation”, and therefore today’s elections could be less important to sentiment.
The wealth manager says any real volatility may come from full Democratic control, as markets would begin to price in a stronger chance of a presidential impeachment.