Split Congress Would Be Best Scenario For Markets - Analysts
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(Kitco News)- American voters are heading to the polls today to casttheir ballot in the much-anticipated midterm elections.
Political pundits expect to see a split Congress with theDemocratic Party taking control of the House and the Republican Partymaintaining control of the Senate. While equity market and U.S. dollarinvestors appear to be favoring a Republican victory in Washington, someanalysts say that gridlock could be best for long-term gains.
Crunching data as far back as 1950, Hussein Sayed, chiefmarket strategist at FXTM, said that on average, the S&P 500 has seenaverage returns of nearly 16% in the 12 months following a midterm electionwhere Congress was split and a Republican President was at the helm.
“While such anomalies are difficult to explain, investorsmay find that a gridlock produces more predictable political outcomes to modeland value equities against. In the case of a gridlock, Democrats cannotroll back recent tax cuts, neither can they tighten the Dodd-Frank bankingrules,” Sayed said in a report Tuesday.
Win Thin, global head of currency strategy at BrownBrothers Harriman, agreed that a split Congress would be the most supportiveoutcome for financial markets.
“The economic status quo would continue but having oneDemocratic chamber would allow for some checks and balances on the Executivebranch,” he said. “The Fed will feel comfortable continuing the tighteningcycle, while another round of tax cuts becomes more unlikely.”
Looking at the other two outcomes, analysts have saidthat markets appear to prefer Republicans maintaining control over Congresscompared to Democrats in power. Sayed said that Democrats controlling Congressis a “nightmare scenario” for markets.
“The Trump impeachment threat will become more real, butstill, this would require help from some Republicans,” he said. “Even if hedoesn’t get impeached, the President will no longer have the power to passbills and probably lead to pulling back some of his deregulatory actions, whichdefinitely is not liked by corporate America.”
Jasper Lawler, head of research at the London CapitalGroup, said that he would expect to see aggressive selloff in equities and theU.S. dollar if a blue wave did sweep through Congress.
Thin added that he sees downsides to both scenarios whereeither party controls Congress.
“If the Republicans are able to hold on to both houses,we think this would ultimately prove to be negative. The administration mayfeel emboldened to enact another round of ill-advised tax cuts. The budgetdeficit has already widened even as the economy continues to grow robustly.Another slug of fiscal stimulus might buy a couple more quarters of growth, butit would come at a high cost when the next recession hits,” he said.
“If theDemocrats are able to take back both houses, we think this too would beeventually be negative for the markets. The Democrats could try to rescind thetax cuts and regulatory rollbacks enacted so far that equity markets haveliked," he added.
As for gold, George Milling-Stanley, head of goldinvestments at State Street Global Advisors, said he sees the yellow metaldoing well in a split Congress.
“I think will get continued gridlock in Washington andthat will ratchet up political uncertainty and I think that is going to bepositive for gold.”
Richard Hayes, CEO of Perth Mint said, in a recentinterview with Kitco News, said that a Democrat-controlled Congress wouldincrease sales of physical silver and gold bullion.
“If Trump doesn’t do well during the mid-term elections it will bring people back to the bullion market,” he said. “For manybullion consumers, Trump is their guy and with him in office and Republican’scontrolling Congress they haven’t had the need to buy gold and silver as aninsurance policy.”
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  |