At the midterm elections to the US Congress, the Republicans – the party of the incumbent US president – have lost majority control of the House of Representatives. By contrast, the GOP has managed to somewhat increase its previously very slim majority in the Senate, the second chamber. The implication is that Donald Trump is going to find it more difficult to push through his agenda in future because legal amendments, as a rule, require the assent of both chambers of Congress.
Even though Trump’s power has eroded, it is to be expected that he will not veer from the “America first“ course on which he has embarked. It could well be that Trump will seek to counter closer parliamentary scrutiny with more belligerent rhetoric. At the end of the day, though, it can be assumed that he will not risk choking off the economic upswing. Such a danger would materialise if US consumers and companies were to be seriously unsettled. Such uncertainty could possibly be triggered by the threat of pronounced price increases on the import side in reaction to high punitive tariff duties.
As we see it, the result of the latest elections is hardly a reason to alter our growth projection. After a rate of expansion of very nearly three percent in the present year, we continue to see cyclical momentum in the US economy only slowing marginally in the coming year.
The outcome of the midterm elections has not prompted us to change either our US key-rate forecast or our prediction for US yields. Rather the contrary is the case: in the event of the Republicans retaking both chambers of Congress, there would probably have been a considerably greater likelihood of a fiscal expenditure programme being passed quickly into law. Such an additional stimulus would have given already dynamic US economic activity a further boost, entailing the danger of the economy overheating. In that case, the Fed would have been obliged to step hard on the monetary brakes. We believe that this danger has now been averted, meaning that the Fed’s interest-rate setters are free to continue down the path towards a mildly restrictive monetary-policy stance which they have already mapped out.
The election result has positive implications for equity markets. Tailwind is being provided by low interest rates and stable economic growth, as well as by the fact that Trump partly measures the success of his economic policy by the level of equity indices. Companies will continue to benefit from the positive knock-on effects of Trump’s tax reform, whereas the new constellation in Congress makes new extreme scenarios (inter alia an escalation in the trade war, a sizeable fiscal-stimulus programme) look less likely. Furthermore, a glance in the rear-view mirror is encouraging for US shareholders: since the end of the Second World War, the average gain logged by the S&P 500 over the twelve months following midterm elections to the House of Representatives and the Senate has amounted to virtually 13%.
We see no need to make any change to our forecast for the US dollar in the wake of the election either.