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US Midterms - a check on Trump's power

November 2018

Trump’s unique brand of rhetoric failed to chime with voters in the mid-terms – what does it mean for investors?

  • Markets have rallied since the mid-term elections
  • The checks and balances on Trump’s power have been welcomed by investors
  • Political gridlock should act as a check on some of Trump’s bigger ambitions

Donald Trump may have declared the mid-term elections a ‘tremendous success’ – was he ever likely to do otherwise? – but that was not how many saw it. Losing the House of Representatives opens him up to potential impeachment and is likely to stop his more radical plans ever coming to fruition. 

Markets seem to be reasonably happy about this, in spite of Trump’s claims that a Democrat resurgence would crash the stock market. There are a number of reasons why some checks and balances on Trump’s power have been welcomed by markets:

The tax cuts: Trump had been promising a 10% tax cut to the middle classes in the hope of winning over undecided voters. However, this means ever higher debt for the US economy and the danger that any growth it produces will be zero-ed out by rate rises from the Federal Reserve. It is a short term ploy designed to give Trump some short-term GDP growth to show off about, but most realise the long-term impact of more tax cuts could be ugly. For this reason, markets are welcoming some gridlock in the US economy. 

It is difficult to know whether losing the House of Representatives will encourage Trump to accelerate his battle with China. However, a dividend legislature is likely to create some paralysis, which may put a check on Trump’s international excesses. Markets would welcome this. The potential outcome of a trade war is still troubling investors. 

There has been a notable weakening of the Dollar since the election. For emerging markets this is a reprieve. Real or illusory, emerging markets labour under the perception that a weak dollar means bad news. It’s also good news for certain parts of the US economy. 

Finally, it means that Trump is less likely to be re-elected in 2020. Markets would probably be glad to see the back of him. He may have brought tax cuts, but he has also brought chronic instability to the global world order and stock markets are never keen on that. Beto O’Rourke’s strong performance in Texas potentially provides the Democrats with a strong contender for the 2020 presidential election. 

The mid-term elections, if nothing else, showed that Trump was vulnerable. Markets don’t normally like this type of uncertainty, but in Trump’s case, they’ll make an exception.  

 

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