Mid-terms give markets what they want

The US mid-terms have resulted in a gridlock with a red Senate and a blue Congress. That’s great news for investors.

No surprises in yesterday’s US elections.

The mid-terms went entirely as expected: the Senate stays red, while Congress turns blue.

And so the “referendum on Trump” ends undecided…

“Even though I’m not on the ballot, in a certain way I am on the ballot,” the US President had proclaimed ahead of the vote.

Republican candidates in Trump’s heartland received enthusiastic backing…

At the same time, plenty of Democrats campaigning on an anti-Trump platform got elected, which overturned the Republican majority in Congress.

The polls got it spot on this time. Our faith in them has been restored. Pollsters no longer have to lie about their profession at birthday parties.

After a turbulent October, a predictable outcome is exactly what the markets needed. Boring is good, as far as the markets are concerned.

In fact, you could say markets don’t give a hoot about politics. As long as politics doesn’t interfere too much with the markets, it’s business as usual.

In this sense, the outcome of the US mid-terms is a dream scenario for investors.

Political gridlock typically means things stay more or less the same. That’s all markets can hope for.

Strong and stable

Markets are apolitical. They don’t care about trivial things like democracy or autocracy. All they want is stability.

Political commentators can sorrowfully observe the demise of democracy when politicians grow more autocratic. But the markets generally aren’t fussed.

There’s no such thing as a “democratic premium” – the idea that markets perform better the more democratic a country is perceived to be.

The São Paulo Stock Exchange has gained 7% since Brazilians elected the “Tropical Trump”. Jair Bolsonaro is a far right leader who isn’t too concerned about things like human rights. But if he doesn’t hurt investors, the markets couldn’t care less.

On the Bosporus, President Recep Tayipp Erdogan is turning Turkey into a democratorship. The markets don’t mind. Turkish indexes have increased tenfold since Erdogan took the reins in 2003.

And the Moscow Exchange has gained nearly 1,600% since Russian President Vladimir Putin came to power in 1999.

Markets rather enjoy seeing the same face in charge. “Strong and stable” is all they’re looking for in a leader.

Only when someone on the hard left, like Jeremy Corbyn, or a political wildcard, like Donald Trump, threatens to take power are investors on high alert.

In the weeks leading up to the 2016 US presidential election, markets closely tracked the polls. They went up when Hillary Clinton went up, and fell when she fell.

Apart from pharmaceutical companies, which the Democratic candidate threatened to put the screws on, the market generally favoured moderate Clinton over maverick Trump.

But soon after his election, Trump’s agenda of tax cuts and deregulation convinced the markets they got it wrong before.

The Republican president now looks like a blessing for investors. The Dow Jones is up 39% since Trump’s shock victory two years ago.

Markets tend to care very little about politics as long as they know what’s coming.

Political deadlock

It’s safe to say the markets are pretty happy with the results of the mid-term elections.

It’s not as good as a Republican sweep, which could have led to more deregulation and tax cuts…

But it was a predictable outcome, which markets like, and if it’s not the best scenario, then surely it’s the second-best result markets could have hoped for.

As long as power is split, in this case with a Republican president and Senate and a Democrat-controlled Congress, the wheels of change will grind to a halt.

If Republicans and Democrats can’t find agreement on tax and economic policies, which is quite likely, nothing much will change. Not for the better, but also not for the worse.

US markets made moderate gains. A big event has come and gone without causing any problems, but that doesn’t mean investors can relax.

Even though the mid-term elections went according to plan, there are more issues troubling the markets at the moment, writes Bloomberg:

“An end to electoral strife doesn’t ensure an end to everything else that tore at investor nerves last month, when $3 trillion was erased from shares.

“The Federal Reserve is still raising rates, Trump’s trade war shows no sign of easing, and little will arrest the gnawing sense the economy’s best days are behind it.”

Still, there is hopeful historical data that could put investors’ minds at ease.

The S&P 500 has been higher 12 months after every single mid-term election since 1946, according to LPL Research. That’s 18 gains after 18 mid-terms in a row.

With political deadlock as its outcome, the mid-term elections could end up giving the markets precisely what they’re craving: stability.

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