I can’t be the only person who has a problem with the consensus on the election and the markets.
The consensus view is that the Democrats will take the House and the Republicans will keep control in the Senate, and that this combination will be good for stocks because gridlock is traditionally good for stocks. Bank of America’s comment on the topic is a good example of the current thinking: It says stocks could surge 12 percent on Washington gridlock.
It’s true that gridlock often has been good for stocks, but it’s not clear it will be this time around. Remember, much of the benefit to stocks in the last two years has come because we were not in a gridlocked environment. That’s how the tax cuts got through.
So, for the last two years, stocks have risen because Washington was not gridlocked. But now we’re expected to believe stocks will go up because it is gridlocked.
Many aspects of the Trump administration’s agenda will certainly continue, such as banking deregulation. While there is little chance that the Trump tax cuts will be rolled back with the Senate in Republican hands, there is also very little chance the tax cuts will be made permanent with the Democrats in the House.
In addition, more stimulus may be tough to come by. Many people, myself included, believe the Republicans will become much more concerned with the buildup in deficits. If that is the case, there will be very little room for any stimulus spending, particularly on the infrastructure projects that everyone agrees are needed but disagrees on how to pay for them.
And if there is even a slight slowdown in the economy, which seems likely, President Donald Trump will likely try to blame the Federal Reserve for raising rates, which will put the Fed in a box that will make it difficult for it to back down.
The Democrats will certainly begin a long investigation into Trump’s finances. Trade tensions will continue. Interest rates are rising.
Thank goodness, not everyone is on board with all this happy talk that the markets will inevitably rise on gridlock. Ben Snider at Goldman Sachs, in a note to clients on Election Day, noted that should the consensus on the election prevail, “we would expect markets to price slightly weaker fiscal stimulus and growth, as well as continued trade tensions, which likely means downside risk to Treasury yields.”
He went on to note that “US equities have historically performed well following midterm elections, regardless of the outcome, although this could be less likely in the current environment with less potential for fiscal policy easing.”
Amen to that. This is a very different environment than last November, when tax cuts were imminent.