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Advisory Firms Weigh In On Midterm Elections

Advisory firms have provided a variety of perspectives on what the midterm elections may mean for capital markets. One common theme is that the Democrats' success in the House of Representatives and the Republicans' success with maintaining a majority in the Senate will result in legislative gridlock that may be favorable for equity markets.

The unorthodox nature of President Donald Trump and the growing differences between Democrats and Republicans caused interest in the midterm elections to soar. Indeed, 49.3% of eligible voters cast ballots, which was the highest percentage in a midterm since 1914, when elections generated a 50.4% turnout, reports Vox.

Janus Henderson explains that having a split Congress has historically been favorable for equities. It explains that since 1928, the S&P 500 Index has delivered average annual returns in the double digits when Democrats and Republicans shared control of Congress. 

Janus Henderson also notes that the gridlock of a split Congress has traditionally been beneficial for equity markets, yet the firm maintains that the midterm results will only have a minimal impact on the investment landscape and the U.S. economy.

The firm reasons that the lion’s share of changes in policy has shifted from Congress to the executive branch and that probably won’t change as a result of the elections. This shift has given regulatory agencies increased power to make changes and Trump has already appointed leaders to many government positions.

The gridlock, however, could prevent additional changes in fiscal policy. Trump and Republicans have signaled interest in enacting additional tax cuts, but Democrats have expressed concerns over deficit spending. With that in mind, Janus Henderson believes fiscal policy will likely go unchanged under the new Congress.

Morgan Stanley believes the biggest change resulting from the elections is likely to be an increased focus on ethics and investigations into Trump’s taxes and cabinet appointments.

The House Ways and Means Committee is likely to use its authority to request Trump’s tax returns, but Trump is likely to resist the request, which could set up a court battle and potential Constitutional crisis. Raymond James maintains that the ongoing investigation into Russia interference election could prompt Trump to dominant news headlines, which could drive market volatility.

At the same time, Raymond James says that Democrats and Republicans may reach surprising compromises on lowering prescription drug costs, infrastructure spending, and immigration.

Morgan Stanley believes that the political environment could benefit the materials and industrials sectors and Washington is likely to address at least the most critical demands for repairing or replacing bridges and roads.

Pressure on President Trump to resolve trade issues as the 2020 election nears may result in improvements in global relations and provide support to industrial companies that have expressed concerns about rising manufacturing input costs that have resulted from tariffs.

The midterm elections are likely to have a neutral impact on the healthcare sector. A split Congress is unlikely to implement a single-payer health insurance program or repeal Obama Care, but legislative actions to lower prescription drug costs could have an adverse impact on biotech companies.

Certain communication firms, however, may be the biggest losers of the changes in Washington as demands grow for additional regulations to protect consumer privacy.

Morgan Stanley says that gridlock could ultimately support emerging markets, many of which have been rocked by a strong U.S. dollar.

Since gridlock will likely prevent Congress and President Trump from enacting additional fiscal stimulus, the Federal Reserve may not need to be more aggressive with tightening monetary policy. With less aggressive monetary tightening, the U.S. dollar is less likely to continue strengthening which should support emerging markets equities.

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