Cannabis producers, global stocks and U.S. bonds could all enjoy a lift from next week’s U.S. midterm elections.
While Donald Trump isn’t on the ballot, his policies definitely are. The vote, in many ways, will be a referendum on Trump-style populism. Most prognosticators predict the Democrats will take back control of the House of Representatives while Republicans will retain control of the Senate.
If the forecasts hold true, the most likely outcome of the election is gridlock. A Democratic majority in the House would raise oversight of the Trump administration and act as at least a partial counterbalance to the White House and Senate. With Republicans no longer controlling all the levers of the Washington policy-making machine, the Trump administration would no longer be able to push through legislation as easily as it has over the past couple of years.
Most Wall Street types argue gridlock would be a negative for markets – a mild negative, to be sure, but still a negative, because it would likely curb Mr. Trump’s investor-friendly policies and lead to greater political uncertainty.
However, that evaluation depends on which markets you mean. On the more positive side of things, gridlock would cast doubts on whether U.S. voters are still in love with Mr. Trump’s America First trade policies. That would seem to be good news for investors in Europe and emerging markets.
Stock markets in Asia and Europe jumped on Friday after the U.S. President tweeted about his “long and very good conversation” with Chinese leader Xi Jinping. Democratic control of the House might encourage Mr. Trump to speed up efforts to reach a trade deal between the two countries.
Granted, there are a lot of uncertainties. Mr. Trump could choose instead to double down on his militaristic rhetoric and continue using executive orders to battle with trade partners. If so, there might be little immediate payoff for international investors. But even in that case, global investors would still welcome signs in the midterms that U.S. voters are not irreversibly sold on the merits of bare-knuckles protectionism.
Bond investors might welcome gridlock, too, because a divided Congress would hamper Mr. Trump’s continuing efforts to stimulate markets by blowing a hole through the federal budget. His spending increases and tax cuts are on track to boost Washington’s deficit to nearly a trillion dollars next year, according to the non-partisan Congressional Budget Office.
As things now stand, the budget gap will be equal to 4.6 per cent of gross domestic product in 2019, a big increase from the 3.5 per cent in the last year of the Obama administration. The gap would grow even bigger if Mr. Trump were able to carry through on his recent vow to deliver yet another round of tax cuts, this time aimed at the middle class.
Big deficits make little sense in an economy operating at full capacity, as the United States is now, with unemployment at its lowest level since 1969. While deficits can help an economy suffering from a downturn, a government that runs a big shortfall during boom times only pushes demand even higher, creating inflationary pressure – which the Federal Reserve then stifles by raising interest rates.
Bond prices, which move in the opposite direction to rates, feel the pain from such tightening moves. So any signs that Washington might become more fiscally responsible – or at least, not lurch into even greater irresponsibility – would be good news for bondholders. It could also help interest-rate sensitive sectors, such as U.S. home builders and utilities.
Other sectors might also feel ripple effects from a divided Washington. Health care stocks, for instance, would likely benefit from growing certainty that Obamacare will not face yet another assault from Republicans. And, according to RBC Capital Markets analysts, biotech stocks could also get a boost, since a split Congress would make it difficult to implement any drug-pricing reform. On the other hand, UBS analysts caution that a Democratic House might crimp military spending, which would hurt defence stocks. The impact in either direction, however, is likely to be muted.
Marijuana stocks could be one of the few groups to enjoy a clear political victory from the midterms. Attorney General Jeff Sessions is widely thought to be departing the Trump administration after the election. Since Mr. Sessions, a socially conservative Republican, has consistently opposed moves to liberalize federal laws on marijuana regulation, his exit could remove an obstacle to the industry’s growth in the United States.
A strong Democratic showing in the election would aid efforts to hand more marijuana regulation over to individual states as proposed in a bipartisan bill introduced in June by Democratic Senator Elizabeth Warren and Republican Senator Cory Gardner. For marijuana investors, at least, the midterms could bring very good news indeed.
Ian McGugan