What the U.S. Midterms Mean for Markets

It is said that in economics terms “when the U.S. sneezes, the rest of the world catches a cold”. So too does the world watch U.S. elections with particular intensity, as the U.S’s system of checks and balances means that a reconfigured constellation of political forces in Congress can dramatically influence policy, and therefore economic and market outcomes. MJ Hudson Allenbridge’s Simon Radford, who received his PhD in Political Science from the University of Southern California and has worked on U.S. political campaigns, takes a look at what happened in the U.S. midterm elections and what it means for market participants.

What Happened

  • The Democrats took the House of Representatives from the Republicans and Nancy Pelosi will once again be Speaker of the House.
  • The Republicans increased their edge in the Senate as some Democratic candidates in states which leaned Republican were toppled (other than Joe Manchin in West Virginia and John Tester in Montana) by candidates who hewed more closely to President Trump’s agenda, as the political make-up of the third of U.S. Senate seats being contested this year favoured the Republicans.
  • States with large cities and decent-sized suburbs trended Democratic, while rural turnout from the Republican base helped Trump and the GOP. States like Tennessee, North Dakota, Ohio, and Missouri swung heavily to Trump, while swings in the opposite direction in major cities and suburbs in some Senate races (Texas, Georgia) got Democrats close to major upsets in the Senate and secured large gains in the House of Representatives.

What It Means

  • Markets have traditionally performed strongest with split party rule. Without the support of the House, it is difficult for a President to push through legislative change, which means a more predictable future for businesses and the economy
  • With the Republican majority Senate having power over Treaty matters, Trump’s trade agenda is likely to be allowed to run its course
  • Trump’s proposed additional tax cuts can’t now happen, which could strengthen the dollar as deficits already widened by the previous round of cuts won’t get any wider
  • The House is likely to stymie much of the White House’s deregulatory agenda in areas like energy and finance. But Trump could use executive orders to bypass Congress, which was a feature of Obama’s Presidency.
  • There is a possibility that Trump will deliver on his election promise to pass a massive infrastructure deal- this could serve as a fiscal stimulus and would also likely find favour with everyone from pro-labour Democrats to the business lobby. This could boost prospects for U.S. firms in construction eyeing major contracts to carry out Trump’s mooted $1 trillion infrastructure proposal.
  • A potentially fruitful area for bipartisan cooperation could be on drug prices, with both President Trump and Congressional Democrats favouring bulk buying of prescription drugs, likely at the expense of pharma companies’ bottom line.
  • As the Senate passes judicial nominees, the judiciary is likely to continue to side with business over labour in contentious matters from union recognition to constraining the role of the federal government in aspects of economic policy in deference to state-level action.
  • The major power that comes with taking the House of Representatives is the ability to subpoena and launch investigations of the White House. This increased political uncertainty will likely add to market volatility over the next two years.