Investors Should Pay Attention to Midterm Elections

Investors Should Pay Attention to Midterm Elections

The U.S. Bureau of Labor Statistics released yesterday (Tuesday) its “Job Openings and Labor Turnover Summary” for the month of June that confirmed, as expected, the very strong conditions the labor market continuous to enjoy. I think it’s certainly worth mentioning that for a third consecutive month there were more job openings than people unemployed while that now, uninterrupted, since January 2015, the number of job openings continuous to exceed the number of hires.

So, the FOMC is spot-on when it writes in its latest statement: “Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen, and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low.”

For investors, and certainly not over the short term, there are no signs that the strong U.S. economy could suddenly weaken.

Under such conditions it is, when possible of course, to take a look at the “political background” in which the strong U.S. economic development is set to continue its course, which should imply, and that is important for investors, further tightening of the Federal Reserve’s monetary policy with raising rates and the further shrinking of its balance sheet.

Impact Scenarios of the Midterm Elections on the Investor

In this context, I’ve read a just released note, which I think could be helpful for investors, of the Standard Chartered Bank, which is a big universal bank that is headquartered in London, England and by the way is present in 70 countries worldwide and employs about 87,000 people.

The Standard Chartered note is written on the theme that investors should start paying more attention to the November U.S. midterm elections.

Please take not that what follows hereafter represents strictly the opinion of the people at the Standard Chartered bank.

We now have reached the moment in time that the campaign for control of Congress is entering a crucial phase about which Federal Election Commission reports show that Republicans defending seats in some of the most competitive races in the House of Representatives have more cash on hand than their Democratic challengers, and that notwithstanding that, polls, turnout and fundraising show Democrats have a credible shot at winning the House in November.

Now, in case the Democrats should regain majorities in the House or even the Senate, it could put them in a position to step up scrutiny of President Trump’s administration and that situation might raise the likelihood of a Congressional gridlock that slows the President’s policy initiatives.

There is no doubt whatsoever that the midterm elections are being increasingly framed as a referendum on Trump and the Republican majority in Congress.

That said, we could take a broad view at how a few election scenarios could play out in the markets:

Firstly, should the Republicans hold onto the House and Senate, they would likely keep President Trump’s policy program in play. Such a scenario would be supportive for stocks and the dollar. On the contrary, bond yields would probably rise as their prices would probably go lower because the Trump administration’s focus on (1) stimulus and (2) lack of emphasis on fiscal deficits.

Secondly, when a change in House control should occur, for example Republicans losing the House by less than 10 seats, such a scenario would probably trigger a short-lived selloff of the dollar and in the asset markets. Nevertheless, market participants would eventually take a less negative view given incumbent parties tend to lose large numbers of seats in the midterms.

Thirdly, in case the Democrats would perform a 10- to 35-seat win, that would raise uncertainty about the 2020 elections outcome. Under such a scenario, investors would need to weigh whether this is a signal of a Democrat swing or a normal mid-term swing that could be reversed in 2 years.

Finally, in case Democrats take a 35+ seat majority, such a scenario would be a difficult outcome for markets to translate as that could suggest a serious loss for the Republicans in the 2020 elections.  

Of course, a popular vote swing for the Democrats is not the only possible scenario, but it cannot be ruled out either.

So far, there is very little evidence that investors are considering this scenario, but in case it would occur, it probably would have the most dramatic effect.

So, yes, investors could do well starting to pay more attention to the U.S. November midterm elections.

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Author: HEDGE

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