In last night’s mid-term elections, the Democrats recaptured the House, while the Republicans maintained control of the Senate. I view a split Congress as neutral to positive for the market. As I write this, the Dow is up +280.

 

The end of the mid-term elections should help the US equity market stabilize by removing a major pocket of uncertainty. The biggest government policy to impact the market (i.e. tax cuts) has already been implemented, and these won’t be repealed.

 

the President has executive power, we don’t anticipate any change with trade policy. There is the possibility of a potential investigation of the President with the Democrats having control of the House of Representatives, but it’s very difficult to bring forward impeachment charges as it would have to be done by the Senate (GOP controlled), and even more difficult to get a conviction.

 

One area to keep an eye on is the behavior of Health Care stocks, as both Pelosi and Hoyer emphasized the sector during victory remarks overnight. But for now valuations remain reasonable, and these stocks have been holding up better than other sectors. Furthermore, the chances of the White House and Congress collaborating on meaningful Health Care legislation in the next few years are low.

 

Global growth, margins and the effects of a stronger USD on corporate profitability will be more important drivers of stock prices in 2019. However, I’ll remind you again that the average decline on the S&P 500 before the mid-term election is -20.6%. The average gain from the mid-term election year low is +47.3% (*data from 1934-2014).

 

Will history repeat itself? Earning’s forecasts and the absence of recession indicators suggest 2019 should be a good year.

 

Tim