Morgan Stanley
  • Wealth Management
  • Nov 12, 2018

U.S. Midterms and Markets: Three Areas That Could Benefit

Although the election will likely be neutral for stocks overall, policy shifts could have positive implications for some sectors, such as health care and industrials.

Lisa Shalett Wealth Management Head of Investment & Portfolio Strategies

Markets staged an impressive rally the first few days after the U.S. midterms. As I wrote before the election, many investors love gridlock and that’s what they got. There was no Republican sweep or blue wave. Democrats now control the House of Representatives, but Republicans retained Senate control and got a few more seats.

Given the polarized climate and with the 2020 Presidential election looming for the next two years, there is little likelihood that bipartisan policy solutions will be achieved. However, that doesn’t mean the midterms will have no market impact. There are some specific sectors and geographies that may benefit. Below are four areas to consider:

  • Health Care: With a Democratic House, repeal of the Affordable Care Act is likely off the table, which could help the sector. However, there is a chance there could be some compromise on drug pricing, which I see as a modest headwind.
  • Industrials: These mostly big, U.S.-based multinationals may benefit from reduced trade tensions  around NAFTA and Europe. Tariffs have already disrupted supply chains of some of the largest U.S. firms so any easing in tension is a plus. The risk of an escalation in trade disputes with China remains, however. 
  • Emerging Markets: With a divided Congress, additional fiscal stimulus is less likely, which means potential for slower growth, easier Federal Reserve policy and a weaker dollar. That can help emerging markets, which typically sell commodities in dollars and have debt denominated in dollars.
  • Treasuries: With additional deficit spending less likely and potential for a less hawkish Fed, Treasuries should get support. We may even see lower interest rates (bond prices move inversely to rates). 

Bottom Line: Markets typically post gains in the six months following midterm elections. It also helps when neither party comes away with a clear victory. While a bounce from October’s swoon has been a relief, my outlook for the rest of the year is for choppy range-bound markets. Third quarter earnings have been strong, but now may be the peak in year-over-year growth.  I continue to favor the value style of investing over growth.

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