A Quick Take On the Midterm Elections
The 2018 mid-term elections were one of the most highly-anticipated mid-terms in recent history. As we digest the results and understand the new landscape, here are some initial thoughts on the potential impacts to the markets.
Uncertainty is reduced and that’s a positive for markets. Part of our rationale for cutting our risk weighting in September was that elections tend to bring uncertainty, and markets dislike uncertainty. While a few individual elections are still up in the air, we know we have a Republican-led Senate and a Democrat-led House. Since 1950, the S&P 500 Index had a positive return in every 12-month period following a mid-term election (17 straight periods!), with an average return of over 15%. Reducing uncertainty is a powerful force.
Both sides will claim victory. Democrats took the House, Republicans expanded their margin in the Senate. From a fiscal policy perspective, this looks to be a neutral outcome. For example, tax reform is unlikely to be rolled back, but also unlikely to be expanded.
There is potential for some compromise. Nancy Pelosi has traditionally believed in results over resistance, and many of the new Democratic House members lean moderate. There are a lot of variables here, but we may have some compromise over gridlock.
The biggest risk seems to be raising the debt ceiling in 2019. The Democrats biggest leverage point will be the debt ceiling vote in early 2019. In 2011, Republicans used that to gain concessions from President Obama to reduce spending. Early indications are that Democrats won’t go the route of brinksmanship, but it’s something we’ll watch.
Headline risks may increase. The Mueller investigation, changes at the SEC, oil and gas production/pipelines and more are potential headline initiatives, more likely noise with regard to the broader markets than anything larger.
Trade and fundamentals likely to take a leading role for markets. Softening of the trade rhetoric with China has been the primary cause of the 5+% bounce over the last week or so. The White House has recognized that, with President Trump’s re-election in 2020 now on the horizon, we would expect progress in 2019, albeit not linear progress. And, 3Q earnings are now projected to increase over 28% year-over-year. While concerns of peak earnings growth are probably founded, on an absolute level earnings should continue to be strong in 2019. As a result, we’ve seen stock valuations come down to levels below their 20-year average. In addition, economic growth continues to be solid and capital expenditures have been moving higher as corporations are putting their extra cash to work.
Brinker Capital’s Investment Committee continually monitors market conditions and follows a structured process for implementing decisions. We employ a dynamic asset allocation approach that complements our long-term strategic allocation with active asset allocation shifts. The active shifts are based on short- and intermediate-term macro views and enable our portfolio managers to take advantage of potential market opportunities and reduce exposure to potential risks, while staying aligned with portfolio objectives.