Technically Speaking: Election Day & What Happens Next

In this past weekend’s newsletter, I noted Raymond James’ Kevin Giddis’ three possible outcomes for the mid-term elections:

“What could a potential change do for bonds and stocks? There are many possible scenarios, so the devil is in the details. I will lay out a couple of them for you:

1) The Republicans could lose the House, or the House and Senate. Either of these possibilities could derail the President’s agenda, leading us back to a period of gridlock that has plagued this country in the past. This would likely be good for bond prices and bad for equity prices.

2) The Republican majority remains intact, and the President pushes forward his plans for another tax cut, among other items as well. This would likely be good for stocks and bad for bond prices.

3) A complete rout that not only gives the majority of both the House and the Senate, it gives them the power and the votes to take on the President. If this happens, bonds could rally in price, the economy could lose its momentum, and the Fed would likely alter its monetary policy.

In the end, however, this turns out, the markets are likely poised for some big changes come next Wednesday.”

Currently, early voting turnout across the country has been extremely heavy and polls are suggesting that Republicans will retain control of Congress.

So, that means #2 is the likely outcome and we should just sell bonds and go “all in” on stocks. Right?

Maybe, but let’s not get too far ahead of ourselves just yet.

You don’t have to go too far back in history to see polls which predicted Hillary Clinton was going to be the “walk away winner” of the 2016 Presidential election. Or, remember the polls that suggested if Donald Trump won, the market would crash?

Neither happened.

Personally, I think the outcome of the election has a lot less to do with the markets than most think, but let’s walk through Kevin’s reasoning.

If we assume the Republican majority remains intact, they are going to continue to increase deficit spending through further tax cuts and potentially an infrastructure program. This will require a substantial increase of debt issuance.The problem will be pushing the deficit well beyond $1 Trillion, which is going to be difficult for many conservatives, will make passage of this agenda a much more difficult process than most believe.