Do midterms matter?

UBS thought leaders explore four potential scenarios for policy and your portfolio

03 Sep 2018

How could the US midterm election play out? In a special report: ElectionWatch 2018, the UBS Chief Investment Office assigns a 60% probability to Democrats picking up a modest majority in the House of Representatives and Republicans keeping control of the Senate.

However, a lot can change between now and Election Day.

"Wild cards can always emerge," said John Savercool, Head of the UBS US Office of Public Policy. "Any wild cards over the next few months will likely be related to the Mueller investigation, in foreign policy or in developments with the tariff disputes that separate the US and trade partners."

In a special UBS On-Air podcast recorded 29 August, Savercool and UBS Chief Investment Officer Americas Mike Ryan shared their latest thinking on the midterm election—the different potential outcomes and how they could affect policymaking, the economy and markets.

For investors, Ryan said, "elections matter, but they're not the only thing that matters." The economy has, for the most part, been thriving over the past two years, corporate earnings are strong and inflation remains contained. "I think the macro drivers matter a great deal more."

'Risks and opportunities'

If Republicans retain control of Congress, they'll likely continue to pursue many of the issues they are currently working on, Savercool said. At the top of their agenda: further deregulation, a follow-up to the recent tax reform bill, border security improvements—including funding for the wall—healthcare reform, and possibly a deficit reduction package.

For markets, there are "risks and opportunities" that come with Republican control of Congress, Ryan added. For example, "Tax reform 2.0" would likely add short-term stimulus and boost equity markets, but unless it is paired with budget cuts or entitlement reform, new tax measures could also push the deficit higher, putting upward pressure on long-term government bond yields.

Would gridlock be good?

If Democrats capture one or both legislative branches, the chances of gridlock are significant, Savercool said.

But while government shutdowns are likely under a Democratic Congress, markets have historically shown very little reaction to such episodes. While there may be short-term volatility, Ryan said, in the past "if it’s a shutdown without a risk of a debt ceiling breach, the impact has actually been pretty limited."

The prospect of impeachment

Chances are slim of President Trump actually being removed from office through impeachment, according to CIO. While a Democratic-controlled House could initiate impeachment proceedings, it's highly unlikely Democrats could muster enough votes to convict him in the Senate.

Even if Democrats do pursue impeachment, the markets' reaction could be muted. Markets seemed not to blink during the Clinton-era proceedings. In fact, once it became clear he would not be removed, markets continued to grind higher through the end of Clinton's second term.

"As long as it's not disruptive and a removal from office, the markets will begin to focus on the fundamentals," Ryan said. "While impeachment is something that could certainly add to market anxiety and volatility, I don't think it's enough to wind up tripping up this bull market."

To learn more about what the election could mean for markets, try CIO's interactive tool and read the full report.

Is your portfolio prepared for a new policy landscape? Together we can find an answer. Connect with your UBS Financial Advisor or find one.

Disclosures