Edward Smith: So the final votes are still being counted, but it's clear that the Democrats have retaken control of the House, while the Republicans have actually extended their majority in the Senate. What does this mean politically? Without the House majority, Trump's or the Republicans’ legislative agenda is likely dead in the water. Basically, anything that requires government expenditure or revenue needs a House majority. So that likely means no major further tax cuts, no cuts to Medicaid or food stamps and no tinkering around with Obamacare.
That said, new Congresses rarely reverse the previous ones’ tax cuts, and we don't expect a major change in the outlook for the budget deficit. However, at least a small redistribution away from the very wealthiest of society does seem likely.
Overnight, House minority leader Nancy Pelosi, now the acting majority leader, said that her two main priorities are; improving infrastructure and lowering drug prices. And importantly, she wants to work with Republicans in order to achieve those aims. That could well be fruitful because there is clear bipartisan support for these issues. And any stocks keyed into those themes it could well be affected.
What does this all mean for markets? Well, we've analysed the data over the last 50 years of midterms. And in the six months before midterm elections, the S&P 500 tends to be rather directionless, much like this year, and it has a little extra volatility much like this year. The good news is that in the following six months, the S&P 500 almost invariably goes up and here is the rub, it rarely matters which party wins, losses, keeps or never had control of Congress in the first place.
Similarly, we don't find any meaningful impact of partisan politics or midterm elections results on the dollar or equity sectors. This idea that one party is better for certain sectors than the other one is rarely seen in the data.
The big risk this year is that Trump hamstrung on Capitol Hill will double down on the one area which he doesn't need congressional approval in order to pursue policy in and that's taking a trade war with China. If that's the direction he heads, then the idea that the S&P 500 performs well after midterms may not play out.
