How will the US midterms affect global markets?
The result of the midterms may have implications for fiscal policy—and therefore the US expansion.
The outcome of the midterms is hard to predict, but the results will affect the outlook for fiscal and trade policy. If the Republicans retain the House, we could see an extension of the current fiscal stimulus to avoid a fiscal cliff ahead of the next Presidential election. If the Democrats take the House, the Trump administration may instead increase its focus on trade policy.
- The US midterms are approaching (6 November), and while it is hard to predict the outcome, there will be market consequences that are worth considering today. The result of the midterms may have implications for fiscal policy—and therefore the US expansion—and also for the administration’s foreign policy, which has particularly upset the outlook for the Chinese economy in recent weeks.
1. Tax cuts 2.0?
The US economy is currently buoyed by an enormous fiscal stimulus, including a cut in national corporate taxes from 35% to 21%, personal income tax cuts and childcare credits. Together, for 2018, these measures have contributed to US GDP growth of nearly 3% year on year and S&P 500 earnings per share growth of more than 20% on current estimates.
But on current plans, these fiscal tailwinds turn to an almighty fiscal headwind in 2020 (Exhibit 1). Given that 2020 is the year of the Presidential election, one might expect the current administration may want to push out this fiscal cliff for another year, which could potentially extend the US cycle (and thus also have implications for US monetary policy).
The administration’s ability to extend the fiscal stimulus depends on the whether the Republican Party maintains sufficient authority to pass such legislation.
EXHIBIT 1: US MIDTERM ELECTION POLICY IMPLICATIONS
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