The November U.S. midterm elections are now only two months away. President Donald Trump and a Republican Congress have implemented a number of market-moving changes since the last election. Bank of America economist Joseph Song[WD] recently looked at what is on the line for investors this November how it could impact the market. The latest polls suggest Democrats could regain a majority in the House of Representatives. However, few polls suggested Trump would win the 2016 election, and investors should be prepared for any outcome. Here are seven ways the midterms could move financial markets.
Best-Case Scenario For Stocks
The Standard & Poors 500 index has performed extremely well under Republican leadership since the 2016 elections, but Song says a change from the status quo may not necessarily be bad news for investors. Song says Republicans have already accomplished many of the goals that drove stocks higher following the 2016 election. Historically, the S&P 500 has performed best under a Republican president when opposing parties control the House and Senate, averaging a 12 percent annual return. However, Song says if Democrats capture both the Senate and the House, investor sentiment and stock prices might take a hit.
2. Treasury Rate Decline
Song says his base-case scenario of a Democratic House and Republican Senate in 2019 would likely result in a modest decline in U.S. 10-year Treasury yields. If Democrats pull off a surprise Senate victory, he says those 10-year yields could decline by between 0.1 and 0.2 percent, flattening the yield curve further. At the same time, if Republicans hold onto both houses, Song predicts the yield curve could steepen by roughly the same magnitude. Song says the U.S. debt limit will likely remain a central issue in Washington in 2019 regardless of the election’s outcome.
3. U.S. Dollar Weakness
The U.S. dollar has been extremely strong in recent months thanks to international trade tensions. Song says the dollar will likely be negatively impacted if Democrats gain control of the House, and even more so if they gain control of the Senate as well. This weakness would be attributed to an increase in perceived political risk, making the U.S. dollar less of a safe bet for international investors. At the same time, a weaker dollar would likely be good for emerging market stocks and commodity mining stocks, such as Newmont Mining Corp. (NEM) and Vale S.A. (VALE).
4. Tax Reform
Tax reform has…
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