“Welcome to Gridlock”: expected midterm results and happy stock traders!
Cong Minh Nguyen, London 08.11.18
LSE SU Business and Finance Guild, London School of Economics
The outcome of the US midterm elections can be regarded at the least politically interesting since it had been widely expected that the Senate would remain red and the House of Representatives would turn blue, meaning any public policy is now under huge difficulty to be passed. Any potential harm to corporate profitability from Washington’s involvement are now erased, certainty brings some light to the stock market, especially when October has been chaos for the S&P 500:
(Figure 1) October is a month of “earning disappointment from key tech companies such as Amazon, fear of rising interest rates, a brewing conflict between Italy and the European Union over budget spending, chaos in Saudi Arabia after the killing of a dissident journalist, and finally, worries that world growth is losing steam” (Imbert, 2018). Although these still persist, Wall Street enjoyed its breakfast with good news on Wednesday about a partisan power split in Congress with Democrats win the House with 225 out of 435 seats and Republicans are assured a continued dominance in Senate (Times, 2018). This means a likely legislative gridlock that has historically been bullish for financial markets as shown in figure 2 below:
Indeed, as shown in figure 1, the S&P 500 increased significantly by 2.1% following the announcement of mid-term results, which is regarded as the “best session gain since 1982” (FT.com.,2018). Normally, after any mid-term elections, the end of uncertainty of the results always causes the stock market to rise. However, such strong performance requires more explanation. In reality, everything followed the investor’s transcript. Such a cripple government will still reserve Trump’s accomplishments to be business-friendly, but limit his extremism in trade war with China. Trump’s aggressive trade strategy with China, including a tariff of 10% on $200 billion of Chinese products followed by response from Beijing of another $60 billion, has truly disturbed the US and Chinese markets and brought investors into confusion about the future of the two biggest economies of the world (Franck, 2018). Indeed, as Democrat is now controlling the lower chamber in Washington, check and balance will put such trade policy under pressure and there is hope of a decrease in trade tension, which will become the market’s opportunity to refocus on economic growth. Indeed, the shares of Caterpillar, which had suffered from Trump’s trade war, increased by 4.4% after the results came out (Franck, 2018). Furthermore, there is an expectedly bipartisan support for infrastructure reform to increase government spending. This is a good sign for companies involved in public work projects such as oil and gas supplier, as well as steel and machinery producers. To illustrate this, following the news of a divided Congress, United Rentals, United Technologies, and Honeywell climbed up 1.2%, 2% and 1.1% respectively for their shares (Franck, 2018). The situation, conversely, is much less certain for pharmaceuticals sectors. Despite certain improvement in share prices for Merck, Pfizer or Johnson & Johnson Co, the worries is that Democrats is going to promote control over price over prescription drug, which might share with ‘Trumpology’ but will bring a hard hit to healthcare and drug-makers. (Franck, 2018). As a whole, Wall Street, however, experiences good time recently. It seems to take a break now, shifting its focus to Fed Rate Call, which, indeed, can still be predictable when political gridlock likely paves the way for less fiscal stimulus not to over-heat the US economy, and therefore less whopping increase in interest rate from the Federal Reserves. The US stock market therefore got what it predicted from mid-term elections and ceteris paribus is recovering from chaos of October to some positivity of a more assured future.
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