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Investment Talks - US Midterm election: A divided Congress opens two possible scenarios

United Kingdom, 11/9/18,  by Amundi

  • Key takeaway: In the midterm election Democrats win the House and the GOP (Grand Old Party) strengthens its position in the Senate.
  • Possible scenarios ahead: We believe there are two paths that could emerge between the Democratic leadership in the House and Trump. The first path is the emergence of divided government, leading to very little meaningful legislation enacted. The second path is a constructive one where there are areas of commonality between Trump and the Democratic leadership in the House (infrastructure spending). The biggest downside risk to financial markets from the midterm elections - a repeal of President Trump's fiscal tax plan – is extremely unlikely, as the Democrats do not have a veto proof majority in the House or in the Senate. However going forward, Trump will need to work with a Democratic House on the budgetary side and will no longer be able to drive fiscal policy, as it remains the purview of the House. Trump will maintain the unfettered ability to impose tariffs, so there continues to be high probability of a further escalation in trade tensions between US and China with the imposition of tariffs on the final $267bn in Chinese exports to the US.
  • Market reaction and investment implications: We do not expect any significant immediate market reaction, however the prospect of key legislation will determine future market evolution. Fixed income markets could come under some pressure if the President and Congress approve a new stimulative fiscal program however we expect 10 year yields to remain around the current levels in the coming months. For equities, the historical precedent has been for markets to underperform ahead of the midterm elections and then rally until year-end. We expect this trend to be confirmed. After the midterm election, moving towards 2019, equity markets will shift their focus more to fundamentals such as earnings sustainability. The outlook is still positive for US equity in 2019, but with a strong focus on selection as the economic and financial cycle mature.

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Amundi is Europe’s largest asset manager by assets under management and ranks in the top 10[1] globally. It manages 1,487 billion[2] euros of assets across six main investment hubs[3]. Amundi offers its clients in Europe, Asia-Pacific, the Middle East and the Americas a wealth of market expertise and a full range of capabilities across the active, passive and real assets investment universes. Clients also have access to a complete set of services and tools. Headquartered in Paris, Amundi was listed in November 2015.

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Footnotes

 

  1. ^ [1] Source IPE “Top 400 asset managers” published in June 2019 and based on AUM as of end December 2018
  2. ^ [2] Amundi figures as of June 30, 2019
  3. ^ [3] Investment hubs: Boston, Dublin, London, Milan, Paris and Tokyo

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