INSUBCONTINENT EXCLUSIVE:
The US stock market may be facing the remainder of Donald Trump’s presidential term with the prospect of less juice to supercharge
it.
Stock returns have been fueled the past year by Trump’s corporate tax cuts, which have pumped up profits
Yet, any hope of further fiscal stimulus in the form of more tax cuts faded with the results of Tuesday’s congressional elections, with
Democrats taking control of the House of Representatives from Trump’s Republican party.
The return to political gridlock in Washington
will likely serve to temper growth expectations, or at least moderate the prospect of additional stimulative fiscal policy,” said Jon
Hill, US Rates Strategist at BMO Capital Markets in New York.
The election comes as the market is also losing the low-rate monetary policy
that has supported equities during its near decade-long bull run, as the Federal Reserve is raising interest rates to stave off
inflation.
Without both fiscal and monetary stimulus, Wall Street performance will depend even more on fundamental factors at a time
investors are looking for signs pointing to when the long economic expansion will finally end.
“This is really not a stock market that
needs more fiscal stimulus and I think in order for the bull market to continue what it really needs is strong earnings in the face of what
is likely to be increasing interest rates,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.
Indeed, some
investors may see a silver lining in the diminished prospects for more tax cuts, given concerns about the ballooning deficit and even higher
interest rates.
“If the Republicans swept today, you would get more fiscal stimulus but that also would likely result in higher interest
rates and the Fed moving potentially faster,” said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta
“So beyond the initial positive reaction, my sense is that there would be some offsets from higher interest rates.”
At the same time,
the potential for some fiscal stimulus is still alive through an infrastructure spending package, an area where analysts say Trump and
Democrats could find common ground and where an agreement could boost stocks, particularly shares in construction and materials
companies.
HEADWINDS AHEADTuesday’s result of a split Congress, with Republicans keeping control of the Senate, was the most likely
scenario projected by polling data and prediction markets ahead of the elections, and had been anticipated by investors.
Immediate market
moves to the news may be misleading
Two years ago, stocks futures plunged when it became clear that Trump would win the presidency, only for them to reverse course within
hours.
Stock market gains this year may indeed continue — stocks historically have climbed following midterm elections
For the two calendar years following each national US election, the SP 500 had a mean annual increase of 12% under Republican-controlled
governments, compared to an increase of 9 per cent for Democratic-controlled governments and a 7% rise for gridlocked governments.
Yet
replicating the lofty returns of Trump’s first half of his term — the stock market is up 29% since his election - may prove
elusive.
Democratic control of the House makes the prospect of a new tax-cut package, following the recent steep cut in the US corporate tax
Trump has been seeking a 10% middle-class tax cut while making permanent individual tax cuts from his 2017 tax overhaul.
The change in House
control could bring other challenges for the market.
Trump’s favoring of light regulations for banks and other industries has created a
climate that investors say has helped stocks
A Democratic-led House could bring greater oversight on industries such as pharmaceuticals and banks.
With fresh oversight power, Democrats
could inspect nearly every aspect of Trump’s presidency from his long-elusive tax returns to possible business ties with Russia and
In the event the House attempts to impeach Trump, history suggests market volatility could spike, at least in the short term, according to
OppenheimerFunds.
But, on the positive side for stocks, analysts doubt Democrats would be able to roll back the heart of the market-friendly
changes, including the corporate tax cuts.
The Democrats’ victory in the House could also benefit the market, some investors have said, by
tempering Trump’s aims such as on international trade.
Any pressure on stocks could be less severe because the stock market already
endured a steep pullback in October from record highs, which some investors in part attribute to jitters over uncertainty about the
