A split Congress (Republican Senate/Democratic House) could have a modestly positive impact on healthcare stocks and modestly negative impact on consumer stocks, but overall, the upcoming midterm elections won’t significantly impact the financial markets, according to a new report by Northern Trust.
“The markets aren’t counting on meaningful legislation being passed, and the tax cuts and deregulatory efforts of President Donald Trump’s administration will remain in place,” writes Chief Investment Strategist James D. McDonald, Head of Fundamental Equities Christopher D. Shipley and Director of Asset Allocation Strategy Daniel J. Phillips.
Forecasts and polling data are predicting that the Republicans hold the Senate and the Democrats take the majority in the House of Representatives. This scenario could create greater uncertainty around fiscal deadlines and the need to pass funding or debt-ceiling legislation, Northern Trust says.
“We are—and investors will likely be—more focused on the outlook for growth and monetary policy,” the firm writes. “We’ve been expecting growth to moderate into 2019, leading the Federal Reserve to back off plans for steady rate increases over the next year. If we are wrong, it will be because either growth is better than we expect (a good scenario) or the Fed doesn’t back off (the bad scenario).”
Northern Trust expects a split Congress to benefit healthcare stocks because it likely will preserve the status quo. If the Democrats take both houses of Congress, there would be an increase in rhetoric toward single-payer national health insurance. A Republican Congress would likely try to get rid of the Affordable Care Act again, increasing more uncertainty around health coverage and enrollment.
A split Congress would likely lead to uncertainty around tax cuts and pressure to raise minimum wages, a negative for consumer stocks, such as retail and restaurants, Northern Trust argues.
“If the Republicans maintain their advantages in both the House and Senate, we’d expect to see a push in making the tax cuts permanent, which would be constructive for consumer-sentiment and thus favorable for retailers and restaurants,” Northern Trust writes. “It may also lead to another look at reforming entitlement programs—any further cuts to SNAP food assistance benefits, unemployment assistance or healthcare coverage would be a potential modest offsetting headwind for the supermarkets/discounters, dollar stores, and drugstores.”
Under a split Congress, EventShares Chief Investment Officer Ben Phillips said he would make minimal changes to his fund’s holdings, the EventShares U.S. Policy Alpha ETF (PLCY), which includes financials, defense, energy and education stocks. But he would also look to add a small allocation to infrastructure, as there’s been bipartisan support for it.