The market had a relief rally right after the election results came in. Yesterday wasn’t so good. The big question on everyone’s mind is where the market is headed from here. Looking historically, the current political arrangement (split Congress, Republican presidency) is the worst for markets. The S&P 500 has had the lowest returns in the current political set up, though it has only occurred four times since 1900.
FINSUM: The market’s outlook for 2019 appears fairly bleak to flat for us. The main reason why is that there won’t be another major tax package, and the great earnings of this year will make 2019 comparisons look weak. Growth is also likely to slow.
The Democrats may have won the House, but they are at a definitive crossroads. While the Republicans currently have a well-defined brand and agenda, the Democrats found themselves largely without a leader and without a clear agenda (other than being anti-Trump). That means they will have some big decisions to make in the near term as they try to mount a push for the presidency in 2020. There appear to be two major policy decisions the party is considering. The first is whether pursuing a fruitless impeachment against Donald Trump would be worthwhile, and the second, and frankly more intriguing question, is whether they will adopt a “Medicare for all” platform.
FINSUM: So much hangs in the balance right now. The Democrats have let themselves be overshadowed by the Republican party and will need to find their ideological and policy footing ahead of the next election. We expect the party’s agenda will move further left in order to serve as a mobilizing foil for its base.
Barron’s has made an argument to investors. Despite all the turmoil recently, and the potential threat of the midterm elections, it says you should stick with stocks. Part of the reason is historical—stocks have usually continued to do well even when Congress flips (though the sample size historically is small). For instance, the stock market continued to perform well when Congress turned against Obama. On a policy front, the outcome looks positive too, as Democrats could limit some of the less popular policies of the Republicans, like a trade war, which would help US corporates.
FINSUM: We think the election is going to be positive for shares if everything goes as it is forecasted to. Any change from the blue House-red Senate prediction might shake markets.
Here is an eye-opener for investors: one of the biggest market reactions to the midterms is likely to be in munis. In particular, yields on munis are expected to fall is the Democrats take the House, which would result in a split Congress. The reason why is that such an outcome would likely limit the further possible damage that could be wrought by Republican tax proposals. However, since the market is anticipating this outcome, if Republicans do maintain their hold on the House and Senate, then yields could rise sharply. The call on the moves comes from Barclays.
FINSUM: The most likely outcome right now seems to be a blue House and a Red Senate, which would mean smooth sailing and likely gains for munis.
For the first time in over a decade, Wall Street is giving more to the Democratic party than the Republican party. For the last ten years, big Wall Street banks and financial houses have leaned towards giving more to Republicans, who had a more favorable policy agenda. However, the pendulum seems to have swung the other way on the back of the kind of disruptions some current Republican policies may bring to bear (e.g. trade war). Bankers themselves are also giving more to Democrats.
FINSUM: Bloomberg framed this giving as an attempt by Wall Street to “soften a blue wave”. That sounds like a fair characterization to us—Wall Street wants to make sure to soften the hard edge of some possible forthcoming democrat policies.