Gridlock in Washington Is Actually Good for Stocks
The November mid-term elections south of the border was supposed to usher in a blue wave, instead, it was more of a puddle. Still, Democrats took control of the House and Republicans extended their hold on the Senate. For investors, a split Congress is a best case scenario, and should help fuel the longest running bull market. While President Trump’s business-friendly policies will continue to juice Wall Street, some stocks are expected to do better than others.
President Trump warned that if Democrats wrangled control from his grip the stock market would suffer. It turns out, he was wrong. Investors like a divided government; at least this particular one. Democrats in charge of the House will provide Washington with checks and balances that were sorely lacking for two years. And historically, equity markets do well when Congress is divided.
Stocks moved significantly higher on Wednesday, October 7, the day after the midterm elections, with the Dow Jones Industrial average up nearly 550 points, or a gain of 2.1%. The S&P 500 meanwhile was also up 2.1% and the tech heavy Nasdaq soared 2.6%.
Wednesday’s rally marked the biggest day-after midterm gains for both the S&P 500 and Dow since 1982, when Ronald Reagan was in the middle of his first term.
Investors were also buoyed by Trump’s desire to work with Democrats, or rather, knowing Trump will have to get along with Democrats if he wants to get anything accomplished over the next two years.
Who Might the Wall Street Winners Be?
One area where Democrats and Republicans could find common ground is with infrastructure. Investments in roads and airport construction would help create jobs and boost economic activity.
If the Democrats and Republicans can agree on infrastructure spending, industrial and materials stocks could be some of the best performers.
Both Republicans and Democrats have said they want to reign in drug prices. Naturally, they don’t agree on how to get there. Still, drug stocks could face headwinds.
The next Congress could see the Democrats curb Trump’s protectionist trade policies and wide ranging tariffs aimed at China. Washington imposed 10% tariffs on $200 billion of Chinese products, with the rate set to increase to 25% by the end of the year. China retaliated with its own tariffs on U.S. goods.
Tariffs were supposed to “Make America Great Again”, but Trump’s tariffs have been hurting steel and aluminum manufacturers and farmers. Key voting blocks for both parties.
If Democrats can reduce trade tensions with China, it could help bolster U.S. growth, and ease global trade pressure.
Then there’s the new US-Mexico-Canada Agreement (USMCA). Trump has been touting how great it is, but the Democrat controlled Congress still needs to approve the agreement. There’s little to no chance it will get ratified before the end of 2018.
At the same time, there’s a good chance the Democrats will want to alter the trade deal before giving it the green light, which may, or may not, be good for Canada.
It’s possible the Democrats will ask Trump to lift the steel and aluminum tariffs placed on Canada and Mexico before they ratify the USMCA. Then again, it’s possible that Trump won’t play games with the Democrats, derailing the USMCA.
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Photo Credit: iStock.com/natasaadzic
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