The relentless selling in October is behind us, but November has maintained the volatile price action. The most expensive and perhaps contentious midterm elections are over. It was a split decision. Naturally, both political parties claimed victory. Democrats took back the House and grabbed some strategic Governorships, while Republicans increased their control in the Senate. The results were almost exactly as forecast. This was quite a different result from 2016 prognostications. So what does this mean? The Market initially rallied and is likely running on the prospects for gridlock. Historically, gridlock has been good for investors. The pro-growth policies already in place will likely stay in place. Will Congress come together in bipartisan fashion to govern with collaboration or is the hostility about to spike. Evidence suggests the latter. Realistically, the midterm completion simply means that the 2020 Presidential election campaign just began.
According to the Constitution, the incoming 116th Congress will convene on January 3rd, but until then Congress will function according to its pre-election makeup. The current House and Senate will meet for about 4 weeks through November and December. It is unlikely any major new legislation gains traction, but the Congress will have to face a funding deadline for the Department of Homeland Security and other parts of the government. Spending authorization expires on December 8. Democrats in the House will sort out their leadership structure and appoint committee heads. California representative Nancy Pelosi, the former Speaker of the House, is expected to run for that office again, but apparently not everyone in the party is providing support. Whatever that outcome, our Washington sources suggest that Democrats will use their new subpoena authority in the House to reinvigorate several investigations of the President, though they may stop short of pushing for outright impeachment. Don’t forget that the Mueller investigation is still out there, with rumors that it might be wrapped up after Thanksgiving.
Despite the strong economic backdrop, party leaders are extremely divided about the direction the nation is headed. Given the US constitutional structure, the partisan split between the House and Senate means that only measures with cross-party support will be able to pass. Importantly, America’s infrastructure is an area where Republicans and Democrats have agreements in principle. Industrial stocks rallied on the prospects, after being battered in October. The new tax code will stay since the Democrats lack the power to roll back the 2017 cuts. But Republicans won’t be able to move ahead on making individual cuts permanent with a “Tax Cut 2.0” that had been floated. It sure looks like “Gridlock” will be a major theme. The uncertainty of the election has been removed. The uncertainty of what’s next is now center stage. The Market seems to be ok with it.
Perhaps the biggest issue that has no clear resolution is the trade tensions between the US and China. Some optimism is building as talks have been revived. The 2 Presidents are still expected to meet at the G20 in 3 weeks. A deal is not expected. A path to a deal seems to be developing though. President Trump has been hyper-focused on deal-making. A comprehensive trade deal with China would be a crowning moment for his Presidency. But it certainly will not be easy. China does not want to give in. However, China’s position of strength has been eroded quite a bit. That will no doubt play a role in the discussions.
The 2018 calendar has been littered with hurdles and milestones. The midterm election was a big one. Dealing with China in a divided Congress is up next. Our sense is a deal with China gets done, but it happens in 2019. There still is division within the White House as to what type of deal would be acceptable. The Market will move higher in anticipation of a deal. But signs that things are unraveling will no doubt send stocks lower. We expect the volatility to continue. This is the strongest period of the Presidential cycle for stocks. But they’re not acting like it. The October selloff was a brutal cleanse. But we’re not seeing the strong bounce that was expected. For that reason, we continue to move money back into the Bond Market. We are prepared for a re-test of the lows before going higher. It is certainly not fun. It likely comes quick.
Monday is Veteran’s Day. We salute all men and women who served our great nation. We also send our positive thoughts and are sending supplies to those suffering from the fires up north and down south.
Have a nice weekend. We will be back, dark and early on Monday.
Mike
