Investors are pleased to have the noise and drama of the latest political contest behind us, as evidenced by the post-election day rally in global equity markets. From Wall Street's perspective, gridlock in government is generally good for the economy. Divided government tends to stabilize the status quo, reducing the likelihood of change and uncertainty.
What That Means for the Next Two Years
The Trump administration has promoted a generally pro-business agenda and will likely continue to use executive orders to do so moving forward. Deregulation efforts in the banking sector and with regards to the environment are expected to continue. An effort may be made to finalize the replacement of the North American Free Trade Agreement between now and the end of the year. Healthcare, immigration, tax and trade policies will remain front and center.
A strengthened majority in the Senate will assist Republicans in their efforts to confirm nominees for government roles, most notably in the judiciary. A Democratic House will be able to block legislation, eliminating the possibility of a second round of tax cuts.
Democrats are expected to initiate a variety of investigations that will make headlines. Overall, the divided government will likely create a lot of political noise but little in terms of economic substance. Federal policies are unlikely to change meaningfully.
What it Means for the Markets
Historically, there’s been a wide range of equity-market performance outcomes during years in which a mid-term election takes place. The following year tends to be notably better or muted at worst, as seen in Exhibit 1, below. Keep in mind that economic conditions have far greater influence on market returns than calendar dates or elections cycles
Overall, we believe the Federal Reserve's rate-hiking cycle, along with the likely escalation of the trade war with China, to be significantly more relevant for financial markets and investors than anything that will happen in Washington.
|Year||Midterm Year||Following Year|
S&P 500 Index: The S&P 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market
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Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
The performance data quoted represents past performance. Past performance does not guarantee future results.