Markets set to rally post-midterms, but only temporarily
The Democrats winning control of the House of Representatives this week will likely lead to a U.S. and global financial markets bounce, as they breathe a sigh of relief that President Trump’s capacity for instigating trade disputes will be restricted by a split Congress.
Indeed, as I was quoted as saying by the BBC, amongst media organisations, the Democrats’ win in the midterms could fuel a rally in U.S. financial markets for the remainder of the year. The rally is also predicted to have a positive impact on global financial markets, due to the robust connection between Wall Street and risk assets elsewhere.
However, this rally could well be short-lived, as it may be countered by legislative gridlock in DC.
This will bring a halt to the bid by the White House to deregulate banking and industry, which in turn could impact sectors including banking, energy, industrials and smaller firms that were due to gain the most from laxer controls.
In addition, pharmaceuticals could suffer as the Democrats look to reduce drug prices.
The gridlock also means that fiscal policy could well be left as it is, with no substantial amendments made to spending or taxation.
As such, the best way for investors to circumvent risks and make the most of opportunities that present themselves is portfolio diversification.
Investors’ portfolios should be sufficiently diversified over assets classes, industrial sectors and geographical regions. This allows them to be best-placed to view any market outcome as an opportunity.
Although this may look like defeat for President Trump, he may not view losing the House of Representatives as too much of a hindrance.
In this instance the President could plausibly lay blame on the Democrats should the economy waver and they decline passing additional tax cuts to drive demand.