Wednesday, December 07, 2022

Elections in the United States, an opportunity to revive Wall Street

In the midterm election next Tuesday, the 8th House of Representatives, made up of 435 representatives and 100 senators, is at stake. Both houses are currently under the authority of the Democrats. by a narrow majority. Electoral appointments, which traditionally refer to the devolution of power from the party occupying the White House Rising rates, very high inflation, with an almost certain horizon of war and recession in Ukraine. The surprise came four days before voting this Friday before the possibility that Donald Trump would repeat as a candidate in 2024 was known, according to his closest aides.

The election will be a referendum of sorts on Joe Biden’s current term and will have significant political and economic implications, although whatever the consequences of the recession, it threatens to prevail. From BlackRock, the world’s largest manager, they point out that “recession overshadows the outcome of these elections”, with the Federal Reserve taking command of the economy because “any sign of a budgetary stimulus will stumble upon monetary policy as the United States does.” happened in the Kingdom”.

Looking at the impact on the market, the data says that the behavior of the stock markets in the coming 12 months after the mid-term elections has been positive. Three scenarios are possible.

a divided Congress

Polls point to a majority of Republicans in the House of Representatives, while Democrats will retain control of the Senate. In short, a divided legislative power. George Brown, an economist at Schröders, points out that “the blockade on Capital Hill favors riskier assets. The US stock market has achieved an annual return of 12.9% when a president has had to deal with a divided Congress”, he explains. Christophe Foliot, manager of the Edmund de Rothschild Fund US Value Fund, points out that if Congress is divided, “some reforms could be made. The executive order regarding foreign policy would be one way to complete the second half of the president’s term. There will be less legislative risk, something the market generally prefers”, he points out.

Ash Alankar, global head of asset allocation at Janus Henderson, also points to the divided Congress as “the best scenario for financial assets and equities”. As the saying goes, with the least government interference and the least political uncertainty, let capitalism do what it does best.” However, David Page, head of macro analysis at AXA IM, sees risks in this election result. “It means a political stalemate and no new financial growth for the next two years. This could be very costly if a recession requires the activation of discretionary fiscal stabilizers,” he explains.

Republican sweep

Schröders’ economists point out that this outcome is the least likely. In addition, any partisan project of Donald Trump’s followers can be vetoed by President Joe Biden, as long as he achieves two-thirds in both houses. George Brown says that initially this scenario will be favorable for the stock market. However, if Republicans wished for tighter controls on spending, a repeat of the 2011 performance when Biden (then Vice President) had to make a last-minute deal with Republicans to avoid US federal default. produced the first debt rating downgrade and the S&P 500 fell 20%”, he recalls. For his part, Pedro del Pozo, director of financial investments at Mutualidad de la Abogacia, points out that “in open conflict with executive power.” Rooms are not the best combination for the time being which is expected to be difficult to approach. Development. , and uncertain from the market point of view”.

François Rimeau, senior strategist at La Française AM, also believes an outright Republican victory is the least likely scenario. “They will try to pass laws on taxes and immigration, but without “supremacy” (60 seats) they will face Democrats who will use a regime of filibusterism (parliamentary barrierism), he explains.

status quo remains

To experts, this appears as the second most likely scenario. Biden’s current policies would be consolidated especially if Democrats managed to win more seats in both chambers. His current weakness in both the Senate and the House of Representatives limits the president’s ambitions. Thus, the Schröders economist points out that an increase in the maximum rates of corporate tax, income and capital gains will be put on the table again. And the law for banking or health will also be tightened. “While riskier assets may benefit from weaker fiscal policy, investors should evaluate its effects on monetary policy,” says Brown.

At Goldman Sachs they state that with a sweeping Democratic victory they will seek to approve parts of the fiscal agenda proposed by President Biden in 2021 that have yet to become law, including expanding health coverage and providing for child care. Includes tax credit for Tax increases. In addition, it will likely enhance the fiscal response in the event of a recession. “Our economists believe that continued Democratic control of Congress may lead to a slightly upward trajectory for interest rates in the coming years,” he concluded. Ash Alankar noted that “with a democratic sweep, there is potential for a significantly larger growth. Due to public spending for the Build Back Better program.

America has become another example of how strong political polarization prevents clear and coercive political victories. Typically, the most anti-government voters are the most organized, which explains the general loss of seats by the party in power that could be repeated in Tuesday’s elections.

donkey or elephant

Democrats, Reinforcement of one or another party is also worthy of reflection of analysts in specific values ​​and areas. Janus Henderson chief Ash Alankar indicates that areas that would benefit if Biden wins seats are “alternative clean energy, hospitals and healthcare companies, those involved in water infrastructure and broadband.”

Republican. If supporters of former President Donald Trump are strengthened, US bank Goldman Sachs believes so-called areas of sin will benefit: prison, tobacco, for-profit education or student loans. As well as related to the military and national security and the fossil fuel industries.

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