The midterm elections are currently dominated by two incompatible assumptions. Democrats think Trump’s low approval rating and the rash of Republican congressional retirements will lead to a big string of victories for their party. Republicans hope that growing economic confidence, underpinned by the White House’s policies, will win out. The big X-factor is now the stock market, which has been gutted over the last few days, a fact which could rattle the economic confidence of Americans. Democrats need 24 seats in the House to take back a majority. Many suspect they will win 30.
FINSUM: Trump and the Republican party are up against history (the party of the President typically does poorly in midterms), and now possibly the markets and economy.
There is no doubt about it, the midterm elections of this year are going to be an enormous challenge for the Republican party. As the election in Alabama last month showed, the tide has swung politically, and many Republicans looking at reelection are facing tough campaigns or have resigned rather than run and lose. Examples of the challenge abound, such as Republican congressman Frelinghuysen from New Jersey, who is facing his first real test in 23 years. History also doesn’t suggest a favorable result, as the midterm election often acts as a referendum on the White House. Democrats got beaten in the midterms after both Clinton and Obama’s elections.
FINSUM: With Trump’s approval rating quite low, it does seem like a lot of the public might retaliate against the party by voting against their GOP congressional candidates.
In one of her parting shots as leader of the Fed, resigning Fed chief Janet Yellen made an interesting statement to Congress: she told them not to worry about the stock rally. She says that stock valuations may be high, but that does not mean it is a bubble. She said she doesn’t have significant worries about imbalances in the economy and that leverage and credit growth “remain contained”.
FINSUM: Interesting that she chose to make these comments as one of her last public statements. We cannot say we wholeheartedly agree.
The market fell in a big way yesterday, at least for 2017. The Dow fell over 100 points and the S&P 500 was off 0.8%. The catalyst? It was worries over what appears to be a faltering tax package. The big problem is that the Senate’s tax plans contrast sharply with the House’s, showing just how far Congress and the Republican party need to go to get a package passed. According to the WSJ, the two plans differ in ways including “the timing of a corporate tax-rate cut, the number of individual tax brackets, the details of international tax rules, and the particulars of estate-tax changes”.
FINSUM: We always thought it would take a lot of time and work to get a new tax package through. However, we do not believe that if Congress fails to do so it will have big impacts on the market. We think investors are incredulous of the prospect for a big tax package and that it has not been priced into this market.
In a very good sign for those hoping the government will pass a tax overhaul package, yesterday the Senate approved a new budget that is expected to pave the way for a tax overhaul. The measure passed 51 to 49, and now puts the onus on the Senate and House to work in unison to harmonize budget and tax plans. The budget approved by the Senate expects up to $1.5 tn in tax cuts. The chair of the Senate budget committee commented on the passage, saying “this budget resolution is the first step to pro-growth tax reform, as it will provide the fiscal headroom needed for the tax-writing committees in the Senate and the House to produce tax reform legislation”.
FINSUM: This is good news! This does seem to clear the way for a tax package, but as ever, the devil is in the details.