So there we have it – the results of the US midterm elections are in, and the Republicans have lost control over the House of Representatives. This has important repercussions for US stocks, as much of the bull market in the S&P 500 over the last year has been driven by measures like tax reform which the Trump administration has been able to get through Congress.
Now, without a friendly House, and the prospect for further investigations into his tax affairs and his relationship with the Russians, Trump is unlikely to deliver further benefits to share investors.
US markets have yet to open this morning, but the USD is already being sold as a result of the midterm elections. US stock index futures are up, however, as the outcome has largely confirmed the expectations of analysts. All well and good, but the optimism is likely to be short term in nature, as just how emasculated the White House has become will be increasingly evident to traders.
“Market impact may be relatively muted, although with a slight risk-off tone initially due to uncertainty about what it will mean vis-a-vis economic policy, tax cuts and deregulation,” said Neil Wilson, chief market analyst at Markets.com. “A lot would depend on how the trade war progresses and how tax cuts 2.0 do in the face of a split Congress and use of executive orders.”
So far the market reaction has not been strong, but we have yet to see how US markets will behave once New York opens. The EUR has risen to a two week high against the USD before hitting a resistance level, while the GBP has also made gains against the greenback.
One victim of the midterms is likely to be Trump’s plans to deregulate the banking industry – major US banks had been hoping Trump would be able to remove some of the shackles placed on them by the Obama administration, but this now looks less likely. Results this quarter for US banks have been broadly positive, and there had been the potential for further big profits in 2019, but many investors had been pinning hopes on further deregulation as part of that.
“Pharmaceuticals may suffer as the Democrats seek to bring down drug prices,” observed Nigel Green, CEO of deVere Group. “This might look like a defeat for Donald Trump, but the reality is he might not mind losing the House of Representatives too much. In this situation he could feasibly then attribute blame towards the Democrats should the economy falter and they refuse to pass more tax cuts to boost demand.”
One beneficiary of the midterm elections and the falling dollar has been mining stocks, which were trading up on the London market this morning, led by Fresnillo and Anglo American, this in anticipation of rising commodities prices as the US dollar takes a beating over the next few weeks. We will have to wait and see what Wall Street does when it opens today, but for medium term investors, the current expectation is that the Trump bull run is going to run out of steam before the end of the year. This would therefore be a good time to either reduce exposure to US equities and buy into other markets, or transfer to short positions once a bear market becomes more established.