As the midterm elections, as predicted, flipped the House to the Democrats and left the Senate under Republican control, political pundits and industry officials are now prognosticating what it all means for the markets and investments as well as for hot-button issues like taxes, health care and regulation.
John Lynch, chief investment strategist for LPL Financial, stated Wednesday morning that it’s a “’something for everyone’ election, as both sides are seemingly pleased with the results.”
While the results were as anticipated — with the Democrats gaining 35 seats in the House — the Republicans “increased their majority in the Senate and this, from a political perspective, appears to validate [President Trump’s] strategy of taking a hard line on immigration and trade,” noted David Kelly, chief global strategist for J.P. Morgan Asset Management, in his Wednesday morning commentary.
For starters, Kelly said, the midterms’ “mixed result should increase the odds of a slower U.S. economy in 2019 and beyond, with potentially dampening effects on bond yields and the dollar and, possibly, U.S. stocks.”
However, the impact of the election results on U.S. trade policy “are still uncertain and this will have a major bearing on both the absolute and relative performance of U.S. and international equities,” Kelly opined.
Lynch adds that congressional gridlock may “perhaps” be good.
“S&P 500 Index futures are up solidly overnight,” Lynch said. “Moving past the uncertainty is positive. The market got what it expected, which — all else equal — is positive. Some investors like checks and balances that can take extremes out of play. The S&P 500 is now in the 12-month period post-midterms, and the S&P 500 has not been down in this period since 1946.”
Based on history, Lynch continued, “Republican presidents and a split Congress have been one of the best combinations for stocks, which have gained 15.7% on average in this scenario based on the S&P 500.”
Election results aside, LPL believes “the key market drivers will remain the same,” Lynch states.
Trade and the Federal Reserve, he said, “will still be primary considerations for investors” despite the midterm outcome.
LPL’s “focus will remain on the solid fundamentals supporting economic growth, the direction of interest rates, and the impact of record corporate profits on the financial markets.”
Post the midterms, here’s how Kelly and Lynch see the following issues shaping up:
The House flip “likely kills the idea of ‘Tax Reform 2.0,’” Kelly states.
A tax bill can’t pass without a majority in the House, “and the Democrats will have zero interest in passing another big tax cut that the president would take credit for and could heat up the economy in time for the 2020 election,” Kelly adds.