Financial markets are blessing the new balance of power in Washington, D.C.
Immediately following the results of the midterm elections financial markets had a bounce that observers say means that Wall Street foresees that a new balance of power in Washington, D.C. as tempering the international tariff and trade wars, and facilitating deregulation.
For the midterms, both houses of the U.S. Congress faced a national election on Nov. 6. All 435 seats in the United States House of Representatives, and 35 of the 100 seats in the United States Senate were contested.
In a shift of power, the Democrats may have won an estimated 229 seats to regain a majority in the U.S. House of Representatives, and the Republicans have lost ground, winning 206 seats, according to a forecast from The New York Times. By law, the House has 435 seats and only 218 are needed to have a controlling majority. At press time, nearly a dozen House races were being decided, so final figures were not clear.
For the Senate, the Democrats, however, lost ground as the Republicans took 51 seats and the Democrats won only 46. Two Senate seats are independent of either party and a key race in Florida may have a recount. Each of the 50 states is represented by two Senators.
The immediate response on Wall Street was positive.
By the close of the markets on Wednesday, November 7, the Dow Jones Industrial Average surged to 26,180.3, up by 545.29 points, which represents a 2.13 percent increase.
Many industry observers forecast a market surge after the midterms, including Nigel Green, founder and CEO of deVere Group, an independent investment advisor.
The Democratic takeover of the House is “likely to trigger a U.S. and global financial markets bounce, on relief that President Trump’s scope for waging trade wars will be limited by a divided Congress. But gridlock in Washington will stall the White House’s bid to deregulate banking and industry, so limiting the relief rally,” argues Green via a prepared statement.
“The Democrats gaining control of the House of Representatives is likely to drive a rally in U.S. financial markets into the year-end. This U.S. bounce can also be expected to positively impact global financial markets, given the high correlation between Wall Street and risk assets elsewhere,” Green says.
Yet Green cautions that “this rally will be relatively short-lived as it could then be offset by legislative gridlock in Washington. This will halt deregulation legislation, which in turn will hurt sectors such as banking, energy, industrials, and smaller companies that stood to gain most from looser controls. Pharmaceuticals may suffer as the Democrats seek to bring down drug prices,” Green adds. “The gridlock also means that fiscal policy will largely be maintained as it is, with no significant changes to spending or taxation.”
In response to the new condition, Green is urging portfolio diversification as “the best way for investors to mitigate risks and take advantage of the opportunities that present themselves. Indeed, investors’ portfolios should be diversified enough to see any market outcomes as an opportunity. A well-diversified portfolio should always include several industrial sectors and asset classes, as well as geographical regions.”
The deVere Group offers specialist global financial solutions, and has a network of more than 70 offices across the world, over 80,000 clients and $12 billion under advisement, officials say.
Stephen Jones, chief investment officer for Kames Capital, based in Edinburgh, Scotland, noted on Nov. 6 that a Republican clean sweep of Congress “would embolden Trump afresh — fine for the U.S. (economy, markets, currency) but challenging for the everyone else. If the Democrats gain control in both Houses, then the market reaction is likely to be poor; Trump’s policy push would grind to a halt and could be reversed, and Congress would ‘go after’ Trump.”
Jones says that a divided Congress is probably the best result because it “sees Trump’s more extreme actions reined in but no roll-back of actions taken thus far. Many Democrats are known to be sympathetic with much of Trump’s America First trade agenda and they are unlikely to relinquish the leading role that Trump has demanded for the U.S.”
Jones echoes others in predicting a market rally although he notes that with the Trump era conventional wisdom is dead.
“On one level, the outcome shouldn’t matter as, since 1926 U.S. equities have generated positive returns 87 percent of the time in the nine months following the midterm elections — regardless of which party won or whether there was a change in majority. Nonetheless and as for much of the past two years, this time feels different,” Jones says.
Kames Capital is a registered investment adviser with the SEC, and since October 2017 U.S. institutional investors have been able to access a range of Kames Capital’s fixed income, equity and multi-asset investment strategies. Distribution support is provided by Kames’ sister company Aegon USA Investment Management, officials say.