So this time the pollsters were right; the House of Representatives turns blue, i.e. falls into the hands of the Democrats, while the Senate remains in Republican hands and their grip has tightened. In brief, the risk for additional deficit spending looks more limited which also implies less risk of an overheating economy. The risk of having a ‘lame duck’ President has increased, however, this is not what President Trump is willing to accept and he will be keen to press home his own agenda where possible. Hence, more volatility and friction between the two parties should be the outcome. The expectation of more tax cuts for companies or wealthy individuals looks dead in the water, as the Democrats now control the purse strings. Big investment on infrastructure spending will also need the commitment of the Democrats, they will be resistant to commit further spending which could stimulate the economy as we go into the final years of Trump’s term. This will also add to the growing debt levels in the US. Already this morning, the dollar Index, a well-known gauge for measuring dollar strength, is down. Not a lot but it might be symbolic just the same. The same goes for the yield of the 10 year US Treasury bond.
The question for the markets now will be just how President Trump is going to rule. Will he try to compromise with the Democrats or will he try to get his way via the use of extensive executive orders, which is a directive issued by the President that has the force of law. However, this is far from a simple process and the Supreme Court and the Congress can overturn such orders. Congress can simply pass new legislation that invalidates the executive order. They could also simply torpedo it by refusing to fund it. In brief, all this could imply lengthy and difficult days for lawmakers on Capitol Hill.
Regarding the markets, as the result was what had been expected, we do not see big changes. If anything, in the past the US equity markets have seemed quite content with some form of gridlock on the political front also providing checks and balances on spending. This has tended to result in less legislation and red tape most of the time. The fact that this political uncertainty is now out of the way is a positive and the seasonality element going into the year-end also tends to put a positive spin on the markets. Particularly with the high levels of share buybacks that are due to be announced. Moreover, after the poor month of October, equity markets could be in for a bounce.
Deputy Chief Investment Officer