US midterms: how 10 investment heavyweights reacted

The Democrats have taken control of the lower part of the country's legislature, while the Republicans maintain a narrow lead in the Senate. But what does this mean for investors?

After being thrown a number of curveballs over the last few years, pollsters can breathe a sigh of relief that the result of the US mid-term elections was broadly in line with expectations.

The Democrats have taken control of the lower chamber of Congress, while the Republicans maintain a narrow lead in the Senate.

But what does this mean for investors?

Ten veterans in the wealth and asset management industries share their reactions.

After being thrown a number of curveballs over the last few years, pollsters can breathe a sigh of relief that the result of the US mid-term elections was broadly in line with expectations.

The Democrats have taken control of the lower chamber of Congress, while the Republicans maintain a narrow lead in the Senate.

But what does this mean for investors?

Ten veterans in the wealth and asset management industries share their reactions.

Vincent Reinhart

Chief economist, Standish (part of BNY Mellon IM)

This election result creates a headwind for economic activity in two ways.

First, uncertainty about economic policies is a decided impediment to private sector decision making, and business people and investors will be unsure of the direction of future legislation, regulation and enforcement, importantly, including whether the 2017 tax cuts will be rolled back in 2021. 

Second, if the president is even more assertive on trade and immigration, there is some risk that tariffs and restrictions will pose an adverse cost shock to the US economy.

These forces combine to slow economic growth, likely leading the Federal Reserve to trim back its rate hiking intentions and prompting investors to be more wary about risk.

James Athey

Senior investment manager, Aberdeen Standard Investments 

Markets will move quickly to speculate on how this result may embolden Trump’s foreign policy, since it’s the most obvious area where he can operate largely without Congressional support.

Their focus will probably be on this month’s G20 summit for signals of which way he’ll turn now on the trade war with China, or indeed how willing China might now be to return to the negotiating table.

The trade war is probably already hurting the companies that many of his core voters work for. So he needs to hector those beyond the US border with caution lest his voters cotton on that his policies are hurting them. That could mean he tries to seek a deal with China, who it seems now really need one to help draw a line under their recent economic weakness.

Regardless of whether Trump does strike a deal with China, this is no turning point in his presidency.

Silvia Dall'Angelo

Senior economist, Hermes Investment Management

The outcome of the US midterms was met with relief by financial markets. Equities and bonds rallied, while the USD weakened. Following the correction in equities markets in October, the lift of the uncertainty surrounding the US mid-term elections paves the way for a solid performance of financial markets into year-end. But that could change in 2019 as fundamentals look less supportive and prospects are more uncertain.

The most significant consequences of the US mid-term elections concern the domestic political landscape.

However, some issues are unlikely to disappear. For a start, a constrained president Trump might focus more forcefully on his trade agenda, an area where he enjoys wider freedom to implement policies without Congress approval. Hence, the risk of an escalation of trade tensions with China will linger.

Adrien Szappanyos

Portfolio manager, Trium Capital

This probably means no Obamacare repeal, no major cuts to Medicare and Social Security and no more big tax cuts.

Democrats may now take control of important Congressional committees and in so doing, launch investigations into the Trump administration. Impeachment you say? Even though calls for impeaching Trump might grow louder, this remains unlikely, as a two-thirds majority is needed in the Senate to remove the president from office.

Trade issues should persist, as Trump has been conducting trade policy through executive action without seeking congressional approval.

Candice Bangsund

Vice president and portfolio manager, Fiera Capital

Investor sentiment should be positive in general as a split Congress suggests that Democrats will be unable to roll back tax cuts or reinstate financial regulations, while the status quo for both the economy and the markets should ultimately prevail. As such, global equities are mainly higher this morning as the passage of last night’s events has likely removed an element of uncertainty from the marketplace.

From an interest rate perspective, while rates have indeed declined on dwindling expectations for major fiscal stimulus (and accordingly, an accelerated path of policy normalization), the path of least resistance for rates should be higher as markets refocus their attention to the growth/inflation backdrop in the US and the Federal Reserve's desire to move rates higher, albeit very gradually

David Giroux

Head of investment strategy, T Rowe Price

Going into 2020, investors should be more reticent of the potential for a change in administration and what that could mean for markets, the economy, healthcare, energy, defence, and merger and acquisition activity.

We have had a very pro business, anti regulation, tax cutting administration that has been very good for the stock market. Some would argue that is why we have had such strong economic and wage growth this year.

If we have a change in regime, that could reverse some of these policies and have a knock on effect on the economy and stock market.

The market is forward-looking, so as we think about 2019 and 2020, that possibility will become a factor.

Richard Stammers

Chief investment strategist, KW Wealth

The result is seen as probably marginally positive.

It is likely they will find some common ground but more tax cuts and cuts to Medicare and Social Security may get held up. But does any of that really affect the economy or markets? And just how different really are the Democratic policies?

Well the US economy seems to be going jolly well. But we mustn’t forget some of this is driven by those very things like tax cuts. These sweeteners are coming to an end and so growth is likely to slow. 

The surprisingly strong increase in corporate earnings we have just seen is likely, therefore, to slow as well. That, in turn, is going to cap the upside for US equities. 

As for the comments that the US equity market always does better after the mid-terms – just ignore them. Seldom has there been a better case for past performance having no bearing whatsoever on the future.

Seema Shah

Global investment strategist, Principal Global Investors

While a Republican sweep may have allowed for an additional tax cut next year, driving interest rates higher, there is unlikely to be any major tax legislation under a divided Congress. It is true that both president Trump and congressional Democrats both support infrastructure programs, but the significant differences in the details will likely prevent any deal from taking place.

Furthermore, it is difficult to imagine the Democrats supporting such a concept given that it would surely strengthen president Trump going into the 2020 presidential election. 

The trade war is also little affected by this election. After all, confronting China over its approach to trade, investment, technology and – most importantly – its bid for global dominance is one of the few things both Democrats and Republicans generally agree on.

Clearly healthcare will be a top issue going forward and this is the sector where we will likely see the greatest market reaction from the election outcome.

Jake Robbins

Manager, Premier Global Alpha Growth fund

A divided government has some positives for markets in that the more extreme policies of the Trump presidency will certainly see some push back which financial markets are clearly seeing as a positive.

The great fear was a surprise hold by the Republicans in congress which would have allowed Trump’s combative foreign and trade policies that have so unnerved markets to escalate further. Financial markets are breathing a sigh of relief that this is not the case.

Those sectors hit hardest by tariffs such as basic materials, semis and industrials should see some respite, particularly given their underlying growth prospects have remained pretty good and after the selloff these sectors look attractively valued.

Eric Veiel

Head of US equity, T Rowe Price

It may be tempting for investors to try to link election results to market outcomes, but there is really no consistent relationship between which party is in charge and long term investment success.

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Jake Robbins
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