>>> Mid-Term Election Preview - Scenario & Previsions

Mid-Term Election Preview
Midterm Election Preview:
  • The midterm election takes place Tuesday, November 6, and it is expected one way or another to produce a consequential outcome for the stock market. Exit polls will be released at 17:00 ET, followed by the final results later tonight.
  • Democrats need to gain 23 net seats to win majority control of the House of Representatives. They need to gain 2 net seats to win majority control of the Senate.
  • As of the time of this posting, online betting markets are pricing in a 34% chance that Republicans keep control of the House and an 87% chance that Republicans keep control of the Senate. Accordingly, the prevailing opinion at this juncture is that the midterm election is likely to produce a split Congress.
  • Below we lay out three election scenarios, calling attention to possible investment implications of those outcomes.
Scenario One: Democrats take the House and Republicans hold the Senate.
  • Infrastructure: Some analysts believe that if the Democrats take control of the House, it will make it more likely that a compromise would be reached on infrastructure. However, other analysts believe the political climate might be too toxic for any compromise. Any compromise on infrastructure would be positive for: FLR, KBR, ACM, JEC, GVA, VMC, MLM etc.
  • Technology Regulation: This would need bipartisan support no matter what happens in the midterms. Will need to watch to see if there is any compromise on this issue.
  • Drug Prices: NY Times reported that Democrats are willing to work with the President on legislation to help lower drug prices. This could be negative for the biotech sector.
  • A split Congress will raise the specter of political gridlock that makes it extra challenging to get major legislative action passed that does not involve matters of national security.
  • Banking regulation: Financials could possibly run into some resistance on the idea that a Democratic-led House will curtail the momentum of deregulation policies.. Potential related stocks: XLF, BAC, C, JPM, USB, PNC, GS, MS
Scenario Two: Republicans keep control of House and Senate:
  • A Republican win of the House makes the passage of the USMCA trade agreement more likely (see 10/1 6:16 for stocks that could be impacted). This agreement is getting some bipartisan praise, so it is likely to pass either way.
  • The Trump Administration floated the idea of a capital gains tax reduction through inflation accounting. This idea will be more likely to pass under a Republican-controlled Congress.
  • Republicans will likely take another shot at a repeal and replace of the Affordable Care Act. If the market thinks this effort would be successful, it would be negative for hospital stocks such as: CYH, HCA, CCM, UHS, LPNT and health insurers such as UNH, MOH, CNC, ANTM, AET, CI, HUM, WCG.
  • President Trump floated the idea of a 10% middle class tax cut. This initiative could gain some rhetorical traction, yet passage would still be challenging since it requires 60 votes in the Senate.
Scenario Three: Democrats win both House and Senate.
  • The tax reform bill is expected to be safe under this scenario since President Trump could still veto legislation passed by the Democrats; moreover, it requires a two-thirds vote in each chamber to override a presidential veto and the Democrats wouldn't have that many votes in the Senate without Republican support.
  • With Democrats in control of both Houses, the regulatory reform agenda is apt to hit a roadblock, which is apt to be deemed a negative for certain sectors of the economy that have garnered the benefit of reduced regulations under the GOP-controlled Congress, namely financial and fossil fuel companies.
  • Confirmation of federal judges might be deadlocked, too, and the approval process for cabinet members could be an extended one.
State ballot measures:
  • Medical/recreational marijuana measures in MI, MO, ND, OK, UT. Passage or rejection of these measures could impact: TLRY, CRON, CGC, GWPH, TRTC etc.
  • Medicaid Expansion in ID, MT, NE, UT. Passage would be positive for insurers/hospitals listed above.
  • AZ, NV, WA, CO will decide on ballot measures to limit fossil fuels and increase use of renewable resources. If passed, this might be a slight positive for renewable energy names such as: FSLR, JASO, JKS, SOL, SPWR, VLSR, VGE, TAN. Could also be negative for smaller oil companies.
  • Casino Expansion: FL will decide if the state wants to limit gambling expansion. If it is not limited, it should be positive for regional casinos such as PENN, CZR, MGM, WYNN.