US Mid-term elections appear likely to result in the Republicans winning both Houses.
This may very well be taken as a positive for equity markets over the coming days.
The Biden administration, while welcomed to the office by financial markets, has nonetheless delivered on being a very big-spending government.
Since Biden came to office there have been several controversial moves. The sudden nature of the withdrawal from Afghanistan. The lack of real diplomacy to help prevent war in Europe. Some believe in the blowing up of Germany and Russia’s gas pipeline.
Domestically, it has been all about spending, as the Federal Reserve has been fighting inflation.
That President Biden has continued to claim the economy is the strongest in the world has angered voters.
It is difficult to argue that extreme inflation and a slowing economy are entirely the Biden administration’s fault, but voters will be very clear in their feelings on the matter just the same. To them, if you are in the Oval Office, you are responsible.
The Democrat’s campaign has at times looked a little lost, except to suggest voting Republican is somehow un-democratic. While the Republicans have run strong campaigns on inflation and crime.
A strong Republican victory is entirely likely.
This means President Biden will be unable for the next two years to achieve very much at all. He will be blocked at every turn, and the Republicans may seek to force spending cuts or they will allow the government to run out of money.
Markets may very well initially cheer a return to greater fiscal responsibility, but a little further down the track, there is the risk of a true funding crisis for the government.
If the Republicans do not allow the deficit ceiling to be raised unless Biden cuts spending, and Biden digs in, refusing to do so, then we could very well see the worst government funding crisis this century.
Such a situation would come on top of a faltering economy and aggressive Fed interest rate hikes. Both stocks and property are already in decline. The added impetus of a true financial crisis for the US government may finally push investor sentiment off a cliff. Indeed, potentially bursting the US dollar bubble.
For now, we should see some form of a relief rally in stocks as the Republicans win big, but the longer time horizon will have likely darkened further.
One more small point: Trump is already campaigning for the White House and looks set to win another term in two years.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
