Fire­power for US stocks may lose spark as Democrats gain clout

Gulf Times Business - - BUSINESS -

The US stock mar­ket may be fac­ing the re­main­der of Don­ald Trump’s pres­i­den­tial term with the prospect of less juice to su­per­charge it.

Stock re­turns have been fu­elled the past year by Trump’s cor­po­rate tax cuts, which have pumped up prof­its.

Yet, any hope of fur­ther fis­cal stim­u­lus in the form of more tax cuts faded with the re­sults of Tues­day’s con­gres­sional elec­tions, with Democrats tak­ing con­trol of the House of Rep­re­sen­ta­tives from Trump’s Repub­li­can party.

“The re­turn to po­lit­i­cal grid­lock in Wash­ing­ton will likely serve to tem­per growth ex­pec­ta­tions, or at least moder­ate the prospect of ad­di­tional stim­u­la­tive fis­cal pol­icy,” said Jon Hill, US Rates Strate­gist at BMO Cap­i­tal Mar­kets in New York.

The elec­tion comes as the mar­ket is also los­ing the low-rate mon­e­tary pol­icy that has sup­ported eq­ui­ties dur­ing its near decade-long bull run, as the Fed­eral Re­serve is rais­ing in­ter­est rates to stave off in­fla­tion. With­out both fis­cal and mon­e­tary stim­u­lus, Wall Street per­for­mance will de­pend even more on fun­da­men­tal fac­tors at a time in­vestors are look­ing for signs point­ing to when the long eco­nomic ex­pan­sion will fi­nally end.

“This is re­ally not a stock mar­ket that needs more fis­cal stim­u­lus and I think in or­der for the bull mar­ket to con­tinue what it re­ally needs is strong earn­ings in the face of what is likely to be in­creas­ing in­ter­est rates,” said Rick Meck­ler, part­ner at Cherry Lane In­vest­ments, in New Ver­non, New Jer­sey. In­deed, some in­vestors may see a sil­ver lin­ing in the di­min­ished prospects for more tax cuts, given con­cerns about the bal­loon­ing deficit and even higher in­ter­est rates.

“If the Repub­li­cans swept to­day, you would get more fis­cal stim­u­lus but that also would likely re­sult in higher in­ter­est rates and the Fed mov­ing po­ten­tially faster,” said Keith Lerner, chief mar­ket strate­gist at SunTrust Ad­vi­sory Ser­vices in At­lanta. “So be­yond the ini­tial pos­i­tive re­ac­tion, my sense is that there would be some off­sets from higher in­ter­est rates.”

At the same time, the po­ten­tial for some fis­cal stim­u­lus is still alive through an in­fra­struc­ture spend­ing pack­age, an area where an­a­lysts say Trump and Democrats could find com­mon ground and where an agree­ment could boost stocks, par­tic­u­larly shares in con­struc­tion and ma­te­ri­als com­pa­nies.

Tues­day’s re­sult of a split Congress, with Repub­li­cans keep­ing con­trol of the Se­nate, was the most likely sce­nario pro­jected by polling data and prediction mar­kets ahead of the elec­tions, and had been an­tic­i­pated by in­vestors.

Im­me­di­ate mar­ket moves to the news may be mislead­ing.

Two years ago, stocks fu­tures plunged when it be­came clear that Trump would win the pres­i­dency, only for them to re­verse course within hours.

Stock mar­ket gains this year may in­deed con­tinue – stocks his­tor­i­cally have climbed fol­low­ing midterm elec­tions.

For the two cal­en­dar years fol­low­ing each na­tional US elec­tion, the S&P 500 had a mean an­nual in­crease of 12% un­der Repub­li­can-con­trolled gov­ern­ments, com­pared to an in­crease of 9% for Demo­crat­ic­con­trolled gov­ern­ments and a 7% rise for grid­locked gov­ern­ments.

Yet repli­cat­ing the lofty re­turns of Trump’s first half of his term – the stock mar­ket is up 29% since his elec­tion – may prove elu­sive.

Demo­cratic con­trol of the House makes the prospect of a new tax-cut pack­age, fol­low­ing the re­cent steep cut in the US cor­po­rate tax rate, ap­pear less likely.

Trump has been seek­ing a 10% mid­dle­class tax cut while mak­ing per­ma­nent indi- vid­ual tax cuts from his 2017 tax over­haul.

The change in House con­trol could bring other chal­lenges for the mar­ket.

Trump’s favour­ing of light reg­u­la­tions for banks and other in­dus­tries has cre­ated a cli­mate that in­vestors say has helped stocks.

A Demo­cratic-led House could bring greater over­sight on in­dus­tries such as phar­ma­ceu­ti­cals and banks.

With fresh over­sight power, Democrats could in­spect nearly ev­ery as­pect of Trump’s pres­i­dency from his long-elu­sive tax re­turns to pos­si­ble busi­ness ties with Rus­sia and con­flicts of in­ter­est.

In the event the House at­tempts to im­peach Trump, his­tory sug­gests mar­ket volatil­ity could spike, at least in the short term, ac­cord­ing to Op­pen­heimerFunds.

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