My Theory on the Trade Tensions and the Midterm Elections

Over the last couple of weeks, I have read several articles about the midterm elections and how they might impact the stock market. I have also been asked by friends what I thought would happen if the Democrats take control of Congress.

I have seen articles that argue that if the Democrats take control of the House, it will increase the risk associated with investing in stocks. And other articles argue that the markets should see a rally after the midterm elections.

Personally, I don’t think investors should worry about the overall market and how the midterm elections may affect it. Historically the market has performed better when the White House and Congress have been split between the parties.

If you look at it, there are four possible scenarios: the Democrats control both the White House and Congress, the Republicans control both the White House and Congress, Democrats control the White House while Republicans control Congress, and Republicans control the White House while Democrats control Congress.

The best returns have been had when a Democrat was in the White House and Republicans controlled Congress. Those numbers are obviously skewed by the Clinton years and also by the Obama years.

President Clinton was the beneficiary of a strong economy and huge growth in the tech sector and the economy got a boost from tech spending late in his second term as everyone prepared for the Y2K concerns. Most companies upgraded or bought all new computers and software out of fear of what might happen.

President Obama took over an economy that was in a recession and was nearing the end of the period. That obviously helped boost the market during his eight years, but the trend has continued since President Trump took office.

The second best returns have come when a Republican occupied the White House and the Democrats have controlled Congress. Those numbers were heavily influenced by Reagan’s last six years and also by the Eisenhower years.

The worst returns for the market have come when one party or the other controlled both the White House and the Senate.

This is an inflation-adjusted chart of the Dow Jones Industrial Average over the last 100 years. It is from MacroTrends.net. If you look at the different periods when the different branches of government were split between the parties, you will see that those are the periods where we have seen the greatest gains.

Don’t get me wrong, just because the historical results show that a split between the parties is a good thing for the market, that doesn’t mean there won’t be a knee-jerk reaction should the Democrats take control of the House. From what I have read, it is highly unlikely they will seize control of the Senate.

There are also certain industries that could be heavily influenced by the mid-term elections. One in particular that comes to mind is the coal industry. President Trump has tried to revive the industry while most Democrats are against coal due its impact on the environment. Any proposed changes to regulations would definitely be met by resistance from Democrats.

I Predict the Trade Disputes Will Get Resolved In…

This brings me to what I think is going to happen with the trade disputes between the U.S., Canada, China, and the E.U. I predict we will see agreements reached with at least two of the parties in question before the midterm elections.

Even though Congress has not been involved in any of the discussions regarding the trade disputes, I think the Trump administration wants to announce a deal in the next month and a half in order to give Republicans a boost in the elections. Heading into the elections with the trade disputes potentially having a negative impact on the economy and without any resolutions in sight could provide Democrats with a boost.

While history shows that a split in the branches of government has been a good thing for the market, I don’t think President Trump wants to take any chances on losing control of Congress. Announcing a deal with China, Canada, or the EU would allow him to claim a victory and could potentially give Republicans the boost they may need.

Any announcement would likely be greeted by a rally in the market and would remove some of the uncertainty that has been lingering for the last seven or eight months. Yes the market has been hitting record highs, but the trade disputes have definitely been acting as a source of concern.

If I am right and a few deals are reached, not only will U.S. markets get a boost, but so will stocks in Canada, China, and Europe. One possible deterrent to a global stock rally ahead of the elections would be the next round of earnings which will start in the second week of October.

Personally I wouldn’t load up on bullish or bearish positions at this time. There are many stocks and indices that are in overbought territory and could see a correction, with or without any trade deals. I also believe the President is unpredictable and I wouldn’t be willing to invest based on what I expect him to do. If I wanted to do that, I would bet on football games on the weekends—in other words, it would be gambling.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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