- It seems unlikely that any of the potential outcomes will change the trajectory of US policy on trade and tariffs
- A Republican sweep of both houses of the US Congress could bring fiscal stimulus and renew upward pressure on US interest rates
- Even a Democratic success across both houses of Congress would be unlikely to result in the removal of the sitting President
- A Congressional split or a Democratic sweep pose asymmetric risks to markets
- Capital-protected strategies and hedge fund exposures continue to be valuable to investors in the current environment
With October’s dramatic declines in markets, it has been easy to overlook the fact that the United States will hold Congressional elections next week. Having met with a range of investors in three continents during September and October, hope exists that some form of Democratic victory can staunch the aggressive domestic and international policy agenda of the Trump administration. Politically, however, we see limited prospects of this happening, irrespective of the outcome of the vote on 6 November.
The latest polling indicates the most likely outcome is for the Democrats to regain control of the US House of Representatives (84% probability as per fivethirtyeight.com) with the Republicans keeping their majority in the US Senate (83% probability as per fivethirtyeight.com). Of course, polling predictions can carry their own risks as seen in the Presidential elections of 2016.
It therefore feels prudent at this stage to explore the implications of four potential outcomes for the 6 November elections and their broader potential consequences for US politics, policy, and markets looking ahead.
US Congress splits between Democrats/Republicans
Based on polls, the most likely outcome (70% probability as per fivethirtyeight.com) is for split control of the US Congress with Democrats taking the House of Representatives and Republicans controlling the Senate. Politically, control of the House of Representatives would enable Democrats to begin impeachment proceedings against President Trump. However, investors should remember that the venue for any impeachment trial is the US Senate.
So, while a Democratic victory may result in the filing of Articles of Impeachment, with the Republicans in charge at the Senate, it is unlikely that any such trial would result in the removal of the US President from office.
Such a move would only contribute to legislative paralysis and drive President Trump to focus on areas where he does not require legislation to operate – primarily in the trade and immigration spheres. This would mean no easing in the pace of the agenda he has outlined to date.
From a policy perspective, if Democrats choose not to pursue impeachment, the optimists among them may seek to find areas of common ground with the Republican Senate. President Trump has already proposed middle class tax reductions and floated policy ideas hinting at major infrastructure spending. As Democrats already support an infrastructure programme, tax relief for their core Democratic voters would be likely to receive a warm welcome and the necessary legislative support.
Given the partisan atmosphere in Washington, however, the President may see his interests ahead of his 2020 re-election campaign best served by withholding cooperation with Democrats for the balance of his term in office.
On trade, hopes exist that a Democratic victory in either the House or Senate might be seen as a rebuke to the US President prompting him to retreat from his hardline on policies including trade and tariffs especially in relation to China. However, on balance, Democrats appear to support the tough stance taken against China on trade seeing it as supporting their labour and manufacturing constituents within the US. As a result, we view the election outcome as being unlikely to influence favourably the trajectory of US trade policy from the perspective of the US’s trading partners.
The most likely polling predictions suggest Republicans losing control of the Senate and Democrats failing in their efforts to seize the House (3% probability as per fivethirtyeight.com) is a low probability event.
While this outcome would be the more surprising both to markets and to the President, it should ultimately result in President Trump adopting a more unilateral strategy as outlined above.
In the case of a split Congress, without bi-partisan cooperation on fiscal stimulus, the likely outcome in these scenarios would be legislative paralysis and, at best, limited impacts upon markets and the economy.
However, should House Democrats pursue impeachment hearings, the partisan conflict that probably ensues may confirm the perception of US political dysfunction that has to date not yet been reflected in either currency or bond markets.
Group Chief Investment Officer
and Co-CEO Asset Management
Chief Investment Officer Private Banking
and Head of Asset Allocation
Deputy Head of Asset Allocation