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CAPinsideMärkte3 MIN READING TIME2018-11-07

Investors must be prepared for this after the US congressional elections - 3 scenarios

In the US, the midterm elections are pending. Not only is it about the distribution of seats in the Senate and House of Representatives. The markets of the United States often get a boost after the elections. However, which sectors can derive exactly one advantage from the elections depends entirely on their outcome. Three scenarios are conceivable.

Final spurt ahead of the important intermediate elections. Two years after the presidential election of Donald Trump, the Americans now decide on the distribution of seats in the Senate and in the House of Representatives. A few days before, the Democrats and Republicans are trying to mobilize all reserves. Donald Trump himself travels the US and promotes his policies, even if he is not on a ballot paper. Above all, he never tires of emphasizing how well the American economy is doing. A fact that hardly anyone could complain about. For his opponents, however, it is not the president alone who is responsible, rather the recovery began even before he took office.

His predecessor Barack Obama is also fighting for his Democrats. The ex-president completed numerous appearances for his party. It's also about convincing the hesitant to vote for the Democrats in the midterms. Great is the hope to get the majority in the House of Representatives.

Also important for investors

The elections are not only relevant for supporters of one of the two parties. For investors, the situation could change after the polls. Although it is not said that there will be major upheavals in the US markets. However, it has been evident since 1946 that the broader stock index S & P 500 has always risen after the midterms. This emerges from a study of the consulting firm Strategas. If there is clarity in politics after the elections, investors will come back. Winners and losers are more visible in the markets than before the elections.

But what does that mean for investors after the 2018 midterm elections? Three scenarios are possible, depending on how the Americans decide on the urn.

Scenario 1: Democrats make up the majority in the House of Representatives

In this scenario, the Democrats win the election and occupy most of the seats in the House of Representatives. In this case, the chief economist at asset manager PGIM, Nathan Sheets, notes that a divided congress would often result in a deadlock. In politics, this usually causes annoyance, but the markets could have a positive impact. If the Democrats get the majority in the House of Representatives, they would be able to investigate. Republicans and Democrats could then adopt their own programs in the chambers where they are majority members. But for more, the two parties would not be able to do it alone, as there would be no majorities in the other chambers. In this scenario, investors may be prepared to note that there will be little change in the markets.

For Bank of America economist Joseph Song, a split congress with a Republican president is the best thing that could happen to the markets. In this case, the annual return on the S & P 500 would average 12 percent. But on one issue could Democrats and Republicans agree: the high prices of the drugs. Both Donald Trump and the loser of the recent campaign, Hillary Clinton, favored lower drug purchase prices. In the United States, medicines usually cost more than in Europe. A reform, pushed by both parties, could make medicines more affordable.

Scenario 2: Republicans hold the majority

Again, this scenario is very likely. If Republicans could retain their majority, they would continue to work on a second tax reform. The first version has already been adopted by the House of Representatives. Individuals as well as small and medium-sized enterprises benefited from the first tax reform. Businesses in particular were pleased with the reduction in corporation tax from 35 percent to 21 percent. Among other things, this led to the good quarterly earnings of the American corporations. A new tax reform would particularly benefit retailers, such as Amazon. Because then the US citizens could increase their consumption. Trump's deregulation may continue to have a positive impact on finance and the oil industry.

Scenario 3: The Democrats represent the majority in both houses

That is the most unlikely outcome of the elections, yet possible. In this scenario, Democrats occupy the majority in both houses, the House of Representatives, and the Senate. As a result, the Democrats might embrace Trump's infrastructure plans. Trump had planned to invest billions in the transportation routes and US airports. Actually, this should be done after his inauguration, but this did not happen. Even Barack Obama wanted to improve the ailing streets and airports, but he failed because of the resistance of the Republicans, who did not want to increase the national debt. The construction industry and industrial groups would benefit most from a Democratic move in both houses, according to Joseph Song of the Bank of America.

In the case of a blue wave, the financial sector and the pharmaceutical industry would also be targeted. Senator Sherrod Brown has already announced that it will re-regulate financial institutions. In a victory of the Democrats in both houses, he would direct the Banking Committee. Brown also wants to empower consumers by making financial products safer again.

Trade dispute with China will continue

None of the three scenarios will likely affect the threat of trade war with China. In this situation, Trump had always acted with presidential decrees. The approval of the chambers is not needed for this.