Good relations? | The President, the polls and your portfolio
Last week’s American vote matters wherever you invest.
2 min read
The importance of the US on the world stage puts the knock-on effects of last week’s mid-term elections high on investors’ agendas.
The US has the world’s biggest economy and most traded currency. It is currently in good health, leading global growth and market returns in the year to date.
In addition, UK, European and emerging market companies all have meaningful exposure to the US in terms of where they make money. European companies, for example, generate 16% of their revenues from America.
Any policy changes that affect the US economy could make a huge difference to investors. So all eyes turned stateside last week when Americans went to the polls. And we saw President Trump’s position weaken as the Republicans lost the House of Representatives to the Democrats.
Business as usual for investors
This is a good result for investors. We don’t see it leading to any significant changes in US economic policy, and by extension to markets. Both could even benefit from the fact that one factor of uncertainty has been removed from the equation, making their trajectory easier to judge.
And history shows that, when the mid-terms lead to each party controlling part of the government, it’s typically good for markets. That said, nothing of course is ever guaranteed.
A more important risk for us right now, which we monitor closely, is the US Federal Reserve’s (Fed) push to raise interest rates. Ebullient growth has seen the Fed tightening policy to keep the economy under control to avoid the bust that could follow the latest boom. They have raised rates eight times since 2015 – three times this year – and are expected to do so again before 2018 ends.
This dichotomy between the government’s drive to boost the economy and the Fed’s efforts to control it makes the US interest rate outlook tough to get a grip on. Investor fears of an overly aggressive programme have triggered two periods of market volatility this year, in February and in October. While we don’t see it as a real risk to company profits, market sentiment means it is something we are continuing to monitor.
Coming back to the political landscape, for us there are three key areas worth mentioning concerning the impact of the mid-terms: trade, tax and spending.
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