Trump 'wins' midterms and the best case for global markets

Published 07.11.2018 23:08

Tuesday's U.S. midterm elections were a referendum on the presidency of Donald Trump. Not only did the vast majority of exit poll respondents (two-thirds according to CNN) mention Trump as their motivation for voting, but Trump himself said, "I'm not on the ticket, but I am on the ticket," at a rally in Mississippi. With several races still too close to call late Wednesday, the House of Representatives will revert back to Democratic control after an eight-year spell, whereas the Senate remains in the hands of the Republicans. Following the election, Trump tweeted that it was a "tremendous success," and he's right.

The Democrats will be hard-pressed to repeal any legislation that Trump has already passed and will be unable to pass any legislation without the support of the Republicans and President Trump. In other words, there will be gridlock in Washington for the next two years. Where President Trump is most correct is that it's the Senate that would have been a loss for him, hindering his ability to appoint Supreme Court justices to replace the two liberal justices that are now in their eighties. With the retention of the Senate, should justices Breyer or Ginsburg retire or die while Trump is in office, Trump will almost certainly appoint Brett Kavanaugh type justices along party lines. This will be, despite all else that Trump has "accomplished" Trump's crowning achievement.

Trump has already achieved much of what he wanted to in the first two years of his presidency. Massive cuts in corporate taxes and a robust economy - whether or not you believe he inherited it from Obama - will most likely sustain Trump's base and attract record breaking campaign donations going into the 2020 elections. The campaign promises that he has yet to deliver, a wall along the Mexican border and a tax cut for the middle class, may not be delivered but now he will have the Democrats in the House of Representatives to blame for those "failures." Will the Democrats oppose middle-class tax cuts ahead of the 2020 presidential elections? If they do Trump prevails, if they don't Trump prevails.

On the surface, Trump may not be the master political strategist Bill Clinton was but what he misses in intellect he more than makes up for in luck. The outcome of these midterm elections mean this is the best-case scenario for Trump. Barring a major catastrophe for Trump, he will likely ride this wave of economic prosperity to another win in 2020. Continued relief for corporations and gridlock in the Congress are key ingredients for a sustained bull market. While Democrats may oppose the hikes in the interest rates the U.S. Federal Reserve (the Fed) plans, they can't do anything about it. This may mean dollar weakness for the foreseeable future. Debt markets may benefit from a reprieve in rate hikes that the Fed may decide is prudent in the face of political uncertainty causing a rally in bonds as well. All in all, investors could not have asked for a better outcome to these elections.

Emerging markets have yet to rally following the election news but a softening in rhetoric caused by the election outcome by Trump may cause trade war fears to abate. If this happens, then look to emerging markets to recover following the dip they've seen following Trump's saber rattling. While retention of the Senate by the Republicans may have long-term negative implications on the U.S. judiciary for many decades, in the near term these election results may mean a temporary reprieve for the world economy from the imminent global economic crisis I've been warning about for months now.

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