Yesterday’s election results were largely in line with Wall Street consensus expectations. Most importantly, there were no big surprises. Accordingly, the market responded to the Democratic takeover of the House and the Republican gains in the Senate with a 545-point surge in the Dow, one of the biggest one-day gains of 2018.
With the mid-terms now in the rear-view mirror, we expect President Trump to shift focus to his own re-election, which would make him more aggressive on pro-growth policies. Over the next two years, that means the White House will be loudly proclaiming the virtues of 3%+ GDP growth and unemployment at all-time lows. Get ready for an onslaught of positive economic communications about how Trump is making America great again.
The topline takeaway from the election: Today’s public equities reaction is a sign of positive investor sentiment in days to follow. And, we believe this sentiment will positively impact private capital markets. In fact, we believe the healthy level of M&A and IPO activity we have seen in 2018 could continue well into 2019. With that as a backdrop, here are our thoughts on sectors and themes to watch over the next year.
Election Upside
Health-tech and Pharma-Tech: With Democrats in control of the house, the Affordable Care Act will be back on the table. Democrats will press Republicans to negotiate a deal on the broad healthcare law, including the individual mandate that ends January 1, 2019. This should bode well for healthcare and pharmaceutical companies. In particular, companies involved with addressing the opioid crisis are likely to be the beneficiaries. This is one of the few issues both parties agree upon.
Fintech & Blockchain companies: Deregulation is expected to continue and that will benefit fintech and financial services companies. Banks appear to be more stable, now having passed the stress tests. Deregulation is expected to support continued banking sector profitability. With the SEC changing its stance on blockchain and cryptocurrencies, institutional investments into crypto funds and related derivatives are also likely to increase. On the other hand, the tech sector is expected to see some newer regulation, similar to the new rules imposed in Europe.
Infrastructure: Infrastructure spending is likely to grow. Due to bi-partisan support, we’re likely to see more spending to upgrade the nation’s aging electrical grids and other critical infrastructure. Tech companies directly or indirectly involved in infrastructure projects are likely to be the winners.
Election Downside
Trade wars and tariffs: With the increase in control of the Senate, President Trump might feel emboldened to escalate the trade war rhetoric. If he does, that might negatively affect the US economy and trigger a slowdown in the second half of 2019. Emerging markets will continue to be impacted if the trade wars are prolonged. Those markets could be hurt further if the US dollar continues to stay strong.
Mueller investigation: The firing of Jeff Sessions the day after the election has created uncertainty about the future of the Muller investigation. But an impeachment of the President from the investigation is less likely. What’s more likely are a slew of investigations by House Democrats into Trump policies. If Democrats do initiate impeachment proceedings, that is likely to roil the capital markets and increase volatility.
Taxes: With Democratic control of the House, another set of tax cuts is unlikely. However, the possibility of Democrats undoing the tax cuts is also quite low. Any such move wouldn’t get far in the Senate and would be vetoed by the President if it ever reached his desk.
Wild Cards
Interest rates: The Federal Reserve is likely to continue with three additional interest rate hikes in December, March and June. Then it will likely pause to check the impact of rate hikes on the economy and inflation. Sectors with heightened interest rate sensitivity, such as consumer staples and utilities, could see less incremental investments. Tech is generally viewed as interest rate immune, which could help venture capital investment outlook. Investments into the tech sector could grow further starting in the second half of 2019, as the economy cools down and investors start looking for growth opportunities.
Inflation: This is largely related to the strength in the US dollar, trade wars, and interest rates. Inflation, which is around 2.3%, is tracking with the Fed’s current inflation target of 2%. But the bigger impact could be an intensifying trade war. That could precipitate a slowdown in global trade and decrease investment spending, driving the economy into a recession. A quick agreement on a trade deal is likely to help the overall global outlook and thereby accelerate the flow of capital into the private markets.