Democrats rode a wave of dissatisfaction with President Donald Trump to win control of the U.S. House of Representatives in midterm elections on Tuesday, giving them the opportunity to block Trump’s agenda and ramp up scrutiny on his administration.
Two years after his surprise win of the White House, Trump and his fellow Republicans expanded their majority in the U.S. Senate, following a divisive campaign marked by fierce clashes over race, immigration and other cultural issues.
DAVID JOY, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, BOSTON:
“Historically markets tend to do well once you get beyond the midterms. It didn’t matter what the outcome was, just get beyond the damn thing. It is interesting to me too to see markets up in Europe. I suppose, I know Europe in general scratches their head and isn’t quite sure what to make of President, so that relationship has been a little bit strained obviously, so maybe there is a sense of relief in the divided government that we now have. From Europe’s point of view that is a modest positive, who knows. But the tone, it is a little bit more of a risk-on day so far.
SECTORS: TECH/PHARMACEUTICALS
“I’m not so sure there is going to be an impact on tech, there is probably some bipartisan agreement that tech needs to be examined a little bit more closely, especially vis a vis privacy concerns. So I’m not so sure a big impact there. Maybe a little bit of an impact in some of the cyclical areas if you believe there is now a greater chance of an infrastructure build. We don’t necessarily think so, because I don’t know anybody who isn’t for upgrading the infrastructure, the question has always been how do you pay for it. There has been no consensus on that whatsoever and although it wasn’t talked about at all during the campaign, the budget deficit is big and growing. Maybe you get a little bit of a bounce there.
“Also pharmaceuticals are probably going to be under a little bit more pressure. Democrats seem to be more in tune with the White House issue – drug price capping – than the Senate is.
“I think it is more just relief that the election has come and gone, no surprises, no tail-risk outcome occurred, gridlock is fine, let’s get on with things and worry about the fundamentals issues like earnings, the Fed.”
OVER/UNDERWEIGHT SECTORS:
“I don’t think anything has changed for us, we have basically been neutral on stocks, we haven’t been underweighted. We have been overweighted in parts of the market that have not behaved well coming into this like industrials, materials, things like that. Maybe we get a little bit of a tailwind for them now but no, our view won’t change because the result really wasn’t a surprise.” U.S. VS REST OF THE WORLD:
“A lot of it depends on what happens with the trade dispute with China. We get some progress on that then the prospects for global growth improve, that is going to help almost any market geographically. But it also maybe gives more of a tailwind to places like the eurozone. They are just a lot cheaper than we are, although with the selloff we are not as expensive as we were. We have had a preference for the U.S. heading into this and that won’t change at this point. We have kind of trimmed out equity exposure, more or less, back to neutral. We have had a modest preference for the U.S. within that context globally just because our growth was faster but we won’t change that either.
Our view of next year is actually pretty interesting. Our forecast for GDP growth is now 2.4 percent for 2019. But on a sequential basis we have close to just under 3 percent growth through the first three quarters but then it drops down, our fourth quartter forecast is 1.9 percent as the fiscal stimulus runs out at the end of the federal fiscal year. At the same time, consensus earnings are looking for roughly 9 percent growth next year, but 6 percent in the first half and roughly 12 percent in the second half, which is a little bit inconsistent with a decelerating economic picture. That is something we are watching pretty carefully. I’m not sure we are going to get the earnings growth the Street thinks we are, or at least maybe not in the same sequence, so maybe there has to be some adjustment there in markets. It is all really going to depend on, partially the Fed, you could have three more rate hikes from the Fed by the middle of June, that is going to change the outlook a little bit for some people but also we haven’t resolved any of this China stuff that is going to start to hit our own economy harder in the new year and we might not even get that 2.4 percent that we are looking. A lot of moving parts at this point but one of the things we are looking at is maybe the Street is still a little too optimistic about earnings growth next year. If you look at forward earnings, if it does come in around 9 or 10 percent, the 2019 calendar PE is only about 15 now. If you discount that to a 5 percent growth rate, it is still about 16 times earnings, so that is a lot more reasonable, either one of them, than where we started the year. Sp we’ve built in a little bit of cushion in equity prices even if we get some disappointment on the earnings front.”
KRISTINA HOOPER, CHIEF GLOBAL MARKET STRATEGIST, INVESCO, NEW YORK:
ON WHY TECH IS UP AND OUTLOOK FOR TECH:
“We did see tech take some losses in October. From my perspective that was at least partially a pricing in of the base-case scenario - that the House goes Democratic. This is a fluid situation, and we could see tech selloff again, but right now arguably the worst is priced in. Often times we buy on the rumor, sell on the news, and we also sell on the rumor and buy on the news, and I think that’s what’s happening.
(The picture for regulation) “is worse because it’s one of the few line items that essentially the president and Democrats agree on. Another one for example is drug pricing; however, that’s one that philosophically Republicans are opposed to so that’s unlikely to get through a Republican Senate. We’re more likely to see tech regulation get through a Republican Senate because they’re not too fond of tech companies so that’s a more likely possibility than, for example, drug pricing.”
REASON FOR GAINS IN DRUG COMPANIES POST-ELECTION?
“It’s because we have a Republican Senate so it’s unlikely that we’re going to see anything accomplished.
“That’s something that in general Republicans are opposed to getting involved in - that greater regulation - so I don’t see it getting through a Republican Senate.”
REASON FOR RISK-ON MOOD IN MARKET?
“In general we’re seeing a positive move in stocks because we sold on the rumor and so we’re buying on the news.
“This is an outcome that I think investors can live with and actually see some real positive aspects to. I think the combination (Democrats taking the house and Republicans winning an increased majority in the Senate) has the potential to actually be supportive of the economy.
“Also, the stock market in the very short term is a voting machine and then it becomes more of a weighing machine. Usually we see the visceral reaction initially, and it was fairly obvious based on polls that this would be the outcome, so we saw a lot of trepidation in October. And then given a little time (the market) becomes a weighing machine, and investors start to process what could be the upside, and I think there is some upside from this kind of scenario.
“The upside is those items upon which a Democratic House and the president agree on, like infrastructure spending... There is the potential for significant stimulus.
“In addition, you’ve got a significant pickup in the Senate for Republican seats, beyond what was expected, and that’s a positive because there will be no more nail-biter type Kavanaugh conversations. The future is likely to be a better-oiled machine in terms of the confirmation process.”
GENE TANNUZZO, SENIOR PORTFOLIO MANAGER, COLUMBIA THREADNEEDLE INVESTMENTS, MINNEAPOLIS:
“I don’t think this fundamentally changes our view. On the margin, it comes down to flowing with the Trump economic train. This would slow it down a bit. This isn’t going to change the Fed’s rate-hike path. It’s going to be more difficult to pass legislations. It could create some cap on the 10-year Treasury yield at about 3.25 percent. It’s hard to make the dollar to go higher in the intermediate term. Its rise could stall out.”
“The medium term risks of removal of global liquidity has not gone away. We do have the opportunity to add high-quality fixed-income at more attractive levels. We would consider adding exposure to longer-dated Treasuries and investment-grade credit.”
“I think let’s see how the trade rhetoric progresses. If White House pushes hard on trade and go unilaterally on trade sanctions and tariffs, that could create a difficult environment for emerging markets. Let’s watch China. That is the most disruptive to the global supply chain. We can’t trade on speculations. We have to see progress and agreements with trade partners. I am cautious here.”
GOVERNMENT SHUTDOWN:
“It could become more challenging. I hesitate to make too much of it at point.”
TREASURY ISSUANCE:
“The talk has been larger supply means higher yields, but we haven’t seen that. There is sufficient demand from banks and insurance companies. The long-end has held up quite well.”
MARK ESPOSITO, CHIEF EXECUTIVE OFFICER OF ESPOSITO SECURITIES, DALLAS:
“People are seeing the election outcome as a win by the Republicans so now the stock markets can do well. There is some research we did dating back to World War Two. If we take the low of October 29 through the end of the year, in all years regardless of who wins the election, the market is up 10 percent on average. I think what we are going to see between now and year-end is the ‘mid-term election effect.’ Stocks are undervalued based on corporate earnings and the selloff was too great so I think we are going to see a market that is positive.”
“Elections results are the big news overnight. Amazon and Caterpillar shares are doing well based on those results. The broad market will do well today - be up 1 or 2 percent - and we’ll return to a bull market.”
INVESTMENT FOCUS:
“We still like the Nasdaq. I think that’s where the growth of the U.S. economy will be. We like AI (artificial intelligence), robotics and ETFs (exchange traded funds). I think those are the main drivers for us.”
ON TECHNOLOGY STOCKS:
“We are still projecting great earnings growth for Q4 at 15 percent and for 2019, close to 10 percent growth. Those are great numbers so that’s the catalyst for the advances.”
U.S. MARKETS VS. WORLD/EUROPE/EMERGING MARKETS:
“U.S. is the leader right now. People follow the U.S. so if we do well, it’s good for the global economy. The U.S. dollar has been strong for quite some time, which was a departure from the last decade. With Europe and emerging markets struggling, it looks like U.S. equity markets will continue to be the leader for the rest of the year.”
ON THE U.S. DOLLAR’S FALL:
“I think it will be short lived. It will be similar to the U.S. equity markets which will come back from the October fall off.”
PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL CORP IN CHARLOTTESVILLE, VA
“The election turned out pretty much expected … Now we’re in an environment that people can understand again so they’ll be willing to put some money back on the table. There was a little fear out there. Markets dislike uncertainty. We had uncertainty out there.”
“Historically the midterm to the next election is a strong one for the market. It goes back to the presidential cycle. You’ll see efforts to boost the economy, to help the President’s re-election chance.
“I don’t think you’ll see any effort, unless it’s done quickly by the end of this year, to make the tax cuts permanent or broaden them. That’s off the table.”
“The chances of interest rates rising significantly have slowed down a bit because you’re not going to see the second round of tax cuts. You won’t see a higher than expected deficit. You might see more of a slower rise in interest rates than you would have seen with complete Republican control of Congress again.”
“I’d be worried about healthcare. If anything stuck out to me, it’s healthcare. It was the signature issue of the election. People want more government help with healthcare. If there’s an industry the President and Congress could agree on its the need to do something for healthcare.”
“President Trump’s drug price plan, the odds of it passing probably just went up some. I’m thinking about the drug stocks we own this morning. Companies that rely on a one or two drugs with very high prices, it might be bad news for them, not today, not tomorrow but over the next couple of years. You’re going to see a higher likelihood of drug prices reined in than you would if the Republicans had maintained control of both houses of Congress.” “If there are efforts to broaden Medicare or Medicaid that’s a really expensive thing to do.”
MAZEN ISSA, SENIOR FOREIGN EXCHANGE STRATEGIST AT TD SECURITIES IN NEW YORK:
“There was this expectation that if we didn’t get a divided Congress, we might see risk sentiment becoming a little shaky, but since that didn’t happen we have a risk-on move. That said, for the dollar, there are fewer fiscal initiatives like tax reform to drive sentiment higher. Any sort of fiscal stimulus is less likely to be observed over the next two years.
“In foreign exchange, we have seen a very significant shift of capital flows into U.S. assets recently, helped by fiscal policy that supported the dollar. That does not look like the case going forward. There’s less appetite to trade the Buy America theme. It could be a more challenging environment for the dollar in the next few months.
“The dollar has remained fairly well-loved for a long time. Now that the election uncertainty has passed, we might see a reduction in the dollar long positions. But it’s a slow-burn story, it’s not going to change overnight.
“The dollar looks more vulnerable even though growth looks good. There isn’t really a fresh catalyst to suggest that folks should be accumulating dollars at this moment.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, N.C.
“Because there was no major surprise I don’t think there was massive repricing and you are seeing equities higher.
“You’re going to see outperformance of the U.S. versus the world in the short run because of where we are in the economic cycle. The fiscal stimulus that was put in place only exacerbates that.”
“Emerging markets are really tricky right now because a weaker dollar, all things equal, should be a benefit for emerging markets. The problem is so much of emerging markets is in China, and I don’t see any reason why the China trade war should subside. I think Trump, he’s tempted to double down on the China trade war given his losses in the House so I think that’s a very difficult place to be an investor. You might get whipsawed.”
“Things have repriced and tech is a bit less expensive than it was heading into October... as interest rates continue to rise I find that tech typically underperforms in that environment.”
KENNETH J. TAUBES, CIO OF US INVESTMENT MANAGEMENT, AMUNDI
“We do not expect any significant immediate market reaction, however the prospect of key legislation will determine future market evolution.”
“Fixed income markets could come under some pressure if the President and Congress approve a new stimulative fiscal program however we expect 10 year yields to remain around the current levels in the coming months.”
“For equities, the historical precedent has been for markets to underperform ahead of the midterm elections and then rally until year-end. We expect this trend to be confirmed.
“Moving towards 2019, equity markets will shift their focus more to fundamentals such as earnings sustainability. The outlook is still positive for US equity in 2019, but with a strong focus on selection as the economic and financial cycle mature.”
DEEPAK PURI, CIO AND HEAD WD AMERICAS, DEUTSCHE BANK WEALTH MANAGEMENT
“In previous U.S. Administrations where the President was Republican and the Congress was split (Republicans with a Senate majority and Democrats in control of the House of Representatives), the S&P 500 historically has generated a total return of around 10.8 percent (going back to 1933).”
“Encouragingly, the S&P 500 has also not declined in the 12 months after a midterm election going back to 1946... however, the historical precedents did not feature trade conflicts, so the next 12 months might be different.”
LARRY HATHEWAY, CHIEF ECONOMIST AT GAM INVESTMENTS
“For investors, gridlock over the next two years is potentially positive, insofar as it removes a considerable amount of legislative, tax and regulatory policy uncertainty. The initial market reaction - mostly higher overseas share prices - is consistent with this view.”
“At this juncture it remains premature to draw strong conclusions. Insofar as potential escalation of trade conflict remains a key concern for global growth and the performance of non-US equity markets, investors will likely remain hesitant until further clarifications of policy intent are forthcoming. In that context, the ongoing bilateral discussions between China and the US will become a key focal point.”
KOJI FUKAYA, PRESIDENT, FPG SECURITIES, TOKYO
“The key questions for the currency market after today is, will the Trump administration be able to keep pursuing policies to stimulate the U.S. economy, and will there be a shift towards China over trade?”
KYOYA OKAZAWA, HEAD OF INSTITUTIONAL CLIENTS APAC, BNP PARIBAS, HONG KONG
“The Japanese market is resilient as it has priced in the result which was widely expected, but the impact from the election results could gradually pressure the market.”
“Investors will gradually realize that Democrats are hard on China as well, so what has been a worry to the financial market won’t change even after the midterm elections.”
DOUG BIBEN, FOUNDER AND PORTFOLIO MANAGER AT BCM, LOS ANGELES
“It was a good enough night for the president ... there wasn’t a ‘Blue Wave.’ I think it was a pretty good night for the markets and the U.S. economy. If we were to see fiscal stimulus, it would come in the form of infrastructure. That could be the big stimulus coming if you can put together a coalition. You can’t spin a tax cut politically for the rich but infrastructure is about jobs. I think that is the likely scenario.”
JUAN PEREZ, SENIOR CURRENCY TRADER, TEMPUS, INC, WASHINGTON
“Things fell as expected, so we have to see if the House will affect the trade conflict. This really was what markets priced-in. We may see some recovery from major counterparts, but that alludes more to a natural recovery after the greenback gained by over 2.5 percent throughout October.”
ED AL-HUSSAINY, SENIOR RATES AND CURRENCY ANALYST, COLUMBIA THREADNEEDLE INVESTMENTS, MINNEAPOLIS
“A break of 1.13 in euro/dollar and 3.25 in 10-year Treasury yields are significant short-term technical levels. We are watching for potential spillover effects to other risk assets. In the short term, a Republican loss in the House, although in line with consensus expectations, should nevertheless amplify risk market volatility, detract from positive sentiment, and be positive for US rates.”
“We are confident that these overnight moves will have next to no bearing on the medium-term direction of asset prices as participants digest the final outcome and the 2019 legislative agenda starts to take shape over the next several months.”
MICHAEL PURVES, HEAD OF EQUITY DERIVATIVES STRATEGY, WEEDEN & CO, NEW YORK
“The surprise was that there was no surprise. I think everyone was bracing for any possible, crazy scenario to show itself, but it basically looks like the baseline consensus forecast was correct. If the futures are up now and they stay up it’s because there is an uncertainty factor that is now out of the market.”
JOHN VAIL, CHIEF GLOBAL STRATEGIST, NIKKO ASSET MANAGEMENT, NEW YORK
“The GOP increased its majority in the Senate by several seats, which will make confirmations of judges and administration officials easier and overriding his vetoes harder. It will also make conviction of Trump, if impeached by the House, less likely.”
MASAAKI KANNO, CHIEF ECONOMIST, SONY FINANCIAL HOLDINGS, TOKYO
“To the extent that political uncertainty disappears, the market is likely to be risk on, which means stock prices in the U.S. will likely rise and dollar/yen will be at least stabilized or may rise a little bit.”
JON HILL, US RATES STRATEGIST, BMO CAPITAL MARKETS, NEW YORK
“The return to political gridlock in Washington will likely serve to temper growth expectations, or at least moderate the prospect of additional stimulative fiscal policy. However, we don’t anticipate this to dissuade the Fed from continuing to deliberately tighten monetary policy as other areas of the economy maintain very strong momentum. This combination presents an additional impetus for the (Treasury yield) curve to move flatter from here.”
MOHANNAD AAMA, MANAGING DIRECTOR, BEAM CAPITAL MANAGEMENT LLC, NEW YORK
If one attributes part of the nearly 10 percent drop (in S&P 500) last month to a pricing-in of a worst case outcome then we may be looking at a slight, albeit short-lived, rebound in the days ahead.”
“Now that the elections are behind us, earnings and the Fed will be back in focus. All indications are that neither of those factors support expanding multiples for stocks.”
RAY ATTRILL, HEAD OF FX STRATEGY, NATIONAL AUSTRALIA BANK, SYDNEY
“The markets were geared for the Democrats winning the house. Now, we are seeing the dollar selling off as it looks certain that Democrats are in fact taking the house. This is almost exactly in line with expectations and polls.”
“Trump has still got trade and policy levers and he is more likely to go harder on trade now. That’s our opinion. He will potentially extend tariffs to all Chinese imports by February. We’ll wait to see how this plays out.”
STEVE FRIEDMAN, SENIOR GLOBAL ECONOMIST, BNP PARIBAS ASSET MANAGEMENT, NEW YORK
“In terms of major economic implications, I think importantly, two things don’t change. One is the 2016 tax law changes. With divided government, Democrats will have no ability to roll back any of those measures. And second, trade policy. Because the president has significant authority over trade policy and can move forward without Congress on tariffs.”
“If the domestic agenda is blocked as a result of divided government, Trump could actually pivot more aggressively towards trade because that’s an area where he’s less constrained and he feels like it resonates with his base ... And whether it’s good economic policy or not, I think Democrats are hard pressed to stand up too aggressively to the President on trade policy.”
“I see scope for additional spending measures passed by Congress. That’s because both parties have signaled support for an infrastructure program. Now, there are significant differences in terms of how large it should be, how you pay for it. And the role of the private sector in infrastructure spending. But the will is there, so I think that’s one area where markets might be under-pricing the risk of stimulus.”
JUSTIN WARING, INVESTMENT STRATEGIST, UBS GLOBAL WEALTH MANAGEMENT, NEW YORK
“Some parts of the U.S. equity market could begin to face headwinds over concerns about the tone coming from the Democratic House committees. For example, Representative Maxine Waters looks poised to chair the House Financial Services committee. She has long opposed deregulation efforts for financials.”
“In our view, there is a very low chance of increased regulation under this Congress, but markets will begin to fret about ‘what dreams may come’ if Democrats win a follow-up victory in 2020. Even so, we continue to recommend an overweight to financials. Despite potential perceived headwinds from House committee hearings, there are bigger factors at play, and political considerations are unlikely to override the fundamentals.”