Other Markets' Reactions to Election Results Point to Further Gains for Stocks

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On Monday, I said in this article that whatever the outcome of the U.S. midterm elections, a rally in stocks was the most likely market reaction. That seems to have been accurate, as futures are indicating a triple digit rally in the Dow this morning.

It is fair to say that this was a predictable move, and it is in many ways more to do with underlying conditions and relief that the election is out of the way than any response to the actual results.

The market’s view on the outcome and what it means for the American economy, however, can be divined from the reaction in other markets.

Given my background in interbank forex, it should come as no surprise to anyone that the first place I look is to the currency markets, where the Dollar’s reaction to the outcome was a noticeable decline.

There is always a danger in oversimplifying market moves but the Dollar has been sensitive to expectations for actions by the Federal Reserve for some time and this reaction looks like an extension of that. Democratic control of the House makes it far less likely that the additional tax cuts mentioned by Trump during the campaign will be enacted quickly, if at all.

One could argue that that is good for the dollar’s long-term prospects given the ballooning deficit and debt, but the forex market’s focus is more short-term:

Tax cuts would be stimulative, and the Fed’s attitude to that is clear. Their biggest concern right now is that the tight labor market and strong economy could result in overheating, so they are trying to slow things down a bit with small, gradual rate increases. One of the main drivers of foreign exchange rates is interest rate differentials and a further boost to an already strong economy may well have prompted the Fed to hike rates more aggressively.

The dollar’s reaction to the election results is about reduced expectations for that.

That also explains why Treasury yields are a little lower this morning. The move there is not dramatic, the 10-Year Note is yielding just a few basis points lower, but what seemed like an inevitable climb back to challenge 3.25% has at least been halted for now.

Commodity markets are decidedly mixed. WTI crude oil is lower again based on its own stimuli, most notably supply concerns, while natural gas prices remain elevated and focused on forecasts for a cold winter. Copper futures initially rose overnight but have been trading lower this morning. Once again though, those moves don’t look to be a result of the election, so only really tell us that the results were “as expected.”

In the past, one would have thought that a Democratic House and Republican Senate would lead to a period of moderate measures based on bipartisan cooperation, which is something that the markets usually like. However, if you think that will happen this time around, you haven’t been paying attention.

Washington looks headed for an even more partisan environment, with a House of Representatives focused on investigations of the Presidential administration’s every move, and a Senate whose principal role is as a rubber stamp for judicial appointments.

That would leave us with economic policy being largely dictated by Trump’s White house, through executive orders, and whether you like the thought of that or not, it probably means more pro-business moves that will support the stock market.

All in all, markets around the world took last night’s returns in their stride. The results were not particularly shocking and should result in the best of both worlds for stocks, an environment that may slow down the consumer, and therefore by extension the Fed, while still allowing for moves that boost corporate profits. Add in the lower dollar, which is good for U.S exporters, and that sets us up for a rally that should recover the ground lost in October, and on to new highs as the year draws to a close.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks , Economy , Investing Ideas , Politics , US Markets

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