March 25, 2019

Strategies: Now, the Markets Can Worry About Other Things. Here’s a List.

The UBS Global Wealth Management Chief Investment Office gamed out the various possibilities ahead of the election, concluding that such a sweep “should boost global stock markets, limit increases in long-term bond yields, and support the U.S. dollar.”

But the “base case” that UBS and most other analysts forecast ahead of the voting was what actually happened — a split decision producing gridlock. The real-world validation of so much consensus opinion tilted stock prices upward. And as I wrote last week, the markets have generally prospered after the midterms, regardless of which party has won.

In addition, despite substantial evidence to the contrary, there is a deep, stock-bolstering belief on Wall Street that gridlock — defined as a political alignment in which no single party controls all three branches of government — has been good for the market.

But the data bears this out only when a Democrat has been president and Republicans have held either the House or the Senate. Since 1901, in all such cases, the Dow Jones industrial average has outperformed its long-term average, an analysis by Bespoke Investment Group shows. When a Republican has been president during a stretch of gridlock, the market has lagged.

In the five previous congressional sessions since 1901 in which Republicans controlled the White House and the Senate while Democrats controlled the House — the political alignment in Washington starting in January — the annualized return has been a loss of 1.69 percent. That’s not encouraging, though the data is too scanty to use “as a blueprint for what to expect this time around,” Bespoke said.

The IHS Markit analysis predicted a “legislative impasse” in the new Congress but reserved the possibility of deals on big issues. And several analysts said these might be an infrastructure rebuilding program, measures to reduce prescription drug prices or an agreement to help the so-called Dreamers. These are the young undocumented immigrants who have benefited from an Obama-era program called Deferred Action for Childhood Arrivals, or DACA, but face the possibility of deportation under current Trump administration policies.

But President Trump could demand that a deal on the Dreamers be paired with funding for his coveted border wall, an objective that many Democrats abhor.

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