The good news is the mid-term elections are finally over and the market is rebounding.
There’s no more talk of blue or red waves. The results are in, and we won’t be subjected to those obnoxious commercials – at least for a few months.
The Democrats won back the House, but Republicans still control the Senate. And while a split Congress may see nightmarish to some, it could fuel quite a market rally.
At least, that’s what Investor’s Business Daily tells us.
“Going back 60 years, to the election of 1958, a divided Congress has the best track record, followed by a rubber-stamp Congress run by the president's party. The worst combination has been a unified Congress controlled by the party in opposition to the president.”
And, according to MarketWatch:
“Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one. That’s 18 for 18. Even though we’ve had every possible political combination in the past 72 years. Since 1946, stocks have risen an average of 17% in the year after a midterm. And if you measure from the yearly midterm lows, the results are even better. From their lows, stocks jumped an average of 32% over the next 12 months.”
You’ll always have winners and losers in this scenario.
Potential Big Winner – The Stock Market
The big winner could be the stock market, as a divided government will leave many of Trump’s accomplishments in place. Others argue, it could help cool trade tensions with China.
"Our base case of the Democrats taking over the House holds the potential to reduce downside risks from trade policy friction," Deutsche Bank's chief equity strategist Binky Chadha said, as quoted by CNBC.
Potential Big Winner -- Industrial and Materials Stocks
Both parties have been supportive of infrastructure reform. So, if we see progress on that front, there could be quite a boom in related stocks, including steel producers and manufacturers.
"The Democrats are likely to push plans for large-scale infrastructure spending. Republicans have generally opposed Democratic plans on this issue, but President Trump has expressed support for infrastructure spending and might be willing to help," said HSBC chief U.S. economist, Kevin Logan, according to CNBC.
For example, we could see potential upside in Nucor Corporation (NUE), Vulcan Materials (VMC), and US Steel (X).
Potential Big Loser – Pharmaceutical Stocks
While analysts say it’s unlikely to happen, both parties could find common ground on reducing drug prices, and that could cause a headwind for drug makers.
Politico argues Democrats could subpoena information that could shed light on how much pharmaceutical companies really spend on R&D, marketing and sales, for example.
We will watch to see what unfolds as the new members of the House and Senate take their seats after the beginning of the year.
But with history as our guide, we believe most investors should be pleased with market performance moving forward.