As was predicted by most political pundits, the Democrats regained a majority in the House of Representatives, while Republicans increased their control within the Senate. The election outcome reflects a polarized American electorate – the House and Senate moved in opposite directions during a midterm for the first time in 36 years.
What does a divided Congress mean for U.S. markets and investors? We sat down with Eric Freedman (pictured below), chief investment officer, U.S. Bank Wealth Management, on the day after the election to discuss the potential impacts of the 2018 midterm elections.
Freedman: I need to start with the caveat that if these “rules of thumb” always existed, then everyone would trade on them and they wouldn’t exist anymore. It’s not easy to predict. As a general statement, the American electorate doesn’t change its views abruptly in most circumstances. They appreciate a system of checks and balances. A midterm electorate doesn’t like to give one party a super majority for a prolonged period. What this election result says is that the American people recognize that the economy is weaker and has been challenged. This result gives investors some thought as to what comes next. The two main things the market will be watching in 2019: Federal Reserve interest rates and what happens with China.
Freedman: We’ve maintained a balanced view on markets and portfolios in the next six to 12 months. We don’t think this outcome changes that viewpoint. We think U.S. equities will perform better than non-U.S. equities and bonds may be challenged. It will remain a good corporate environment and will allow consumers to make some strides with wages, which should drive more consumption. Most of the specific impacts of the midterms will be at the sector level, such as health care and energy. What will drive markets on a macro level will be trade and its impact on the U.S. dollar. On balance, the global economy is weakening, not strengthening, so markets will be monitoring what happens with U.S. policy on trade and tax cuts.
Freedman: The biggest would be infrastructure spending. You look at American highways and bridges relative to rest of the world, and they are in a delicate state. Infrastructure spending and possibly shovel-ready projects could get bipartisan support and receive more attention and more directive.
Freedman: The biggest headwind would be if we see more of a partisan divide, which could impact the debt ceiling. If the debt ceiling is viewed as a proverbial political football, that could be a problem. The U.S. does not pay a lot of in terms of our debt expense. We go to the market and say we’d like to sell you 10-year Treasury notes that yield 3.2 percent – that’s a level that borrowers are still comfortable with. If we don’t raise our debt ceiling, which is basically saying that we’re not going to pay you back in a timely manner, you could see China, Japan and others holding U.S. bonds say that rate is not enough for us. We need more than 3.2 percent. That would be a negative thing impacting our borrowing costs.
Q&A facilitated by Heather Draper of U.S. Bank. For additional U.S. Bank Wealth Management market commentary on the midterm election, check out “Midterm election results: A stock market outlook.”
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