The Strategist

What an investor should expect from the US elections

11/09/2018 - 13:57

The elections in the US on November 6 somewhat changed the political landscape in the country: Republicans enhanced influence in the Senate, and the Democrats went to the House of Representatives. What does this mean for the markets?

Courtesy photo
Courtesy photo
On the Election Day, US President Donald Trump said that everything went "with great success." However, the facts suggest otherwise. Democrats managed to get a serious majority in the House of Representatives, even though the Republicans retained influence in the Senate and even won a few more seats in it.

The “blue wave” of democratic support simultaneously was quite ambiguos. On the one hand, the Democrats could not win the Senate. But, on the other hand, the votes, despite serious differences of opinion, especially among the educated population and women, were largely given to the Democratic Party. And although the results of the elections to the House of Representatives did not become such a serious success for the Democrats, as it happened in the past, and strengthening the position of Republicans in the Senate split the Congress even more, the Democratic Party still has reason to be proud.

A Democratic majority in the House of Representatives will mean a change of leader of the majority. Most likely, it will be Nancy Pelosi, a strong and experienced politician. 13 committees of the House (including legal and banking) will change Heads. Most likely, this will lead to abandonment of the deregulation policy, which negatively affects banks and leads to disagreements over drug prices. Eventually, Trump's policy results, such as tax returns and real estate transactions, could be at risk. Democrats have already made it clear that they will make the most of their position in the House of Representatives.

In other words, Trump and his conservative policies will put "sticks in the wheels." In this regard, one should not expect, for example, a new tax cut or adoption of consolidated legislation. Although, of course, everything is possible: the Democrats hint at a possible “cooperation” with Trump, if they consider it useful for America, that is, potentially favorable for infrastructure and leading only to a small tax cut.

The Democratic Party snatched victory from the Republicans, but it lacks the foresight and self-determination outside the context of "antitrump" sentiments. So we can say that Trump was not “blown away”, just his conservative plans stalled a bit.

Now there is an unprecedented division in the United States, and both parties have very serious problems with self-determination. The Republican rankings soar and fall with Trump, and they are not attractive to the growing demographic groups in the United States, especially the millennial generation. And the Democrats do not yet have a coherent agenda, and they have not decided who they are, being torn between more centrist tendencies and progressiveness.

As for the market, it reacted calmly to the election results. US stock futures have increased only slightly. Further, after disappearance of the main danger associated with the elections, this growth may push the NASDAQ Composite and S&P 500 indices upwards. The mid-term elections had little effect on the dynamics of the dollar.

After these events, investors should pay special attention to the current policy of Donald Trump and his attitude towards China. Trump's tax incentive policy has declined; his re-election will now be the focus. In this case, the anti-immigration and anti-Chinese sentiments of the US president will play a leading role in maintaining his rating.

In addition, we should not forget that the mid-term elections in the United States are characterized by strongly pronounced seasonality: they are traditionally preceded by minimum values of stock indices for the year, and the results for the next 12 months are usually positive.

Also, investors need to look closely to the imminent coming of the beginning of the end. Firstly, the amount of cash that is steadily decreasing. Secondly, the cost of raising funds, which continues to grow. Thirdly, the cost of energy, which also rises. And fourth, there is a geopolitical risk.