1. Preparing for gridlock. The midterm election could be a pivotal moment in American history – but it may not be all that meaningful for the stock market.
Political pundits, pollsters and investment banks mostly agree that Democrats are likely to win the House and Republicans are on track to keep control the Senate. CNN’s Harry Enten predicts in The Forecast that Democrats will win a 17-seat majority in the House but Republicans will maintain their slight edge in the Senate.
Gridlock in Washington would prevent the government from enacting new policies, keeping the status quo – at least from Wall Street’s perspective. A split decision from the midterms would probably keep America’s fiscal, trade and regulatory policies on the same trajectory.
“Divided government is increasingly the most likely case, with limited ramifications for markets,” Morgan Stanley strategists Michael Zezas and Meredith Pickett wrote to clients last week.
Barclays agrees. “A Democrat win of the House would likely lead to government gridlock,” the firm wrote last week. “No market-moving legislation is likely to pass through Congress.”
Brexit and the 2016 American presidential election proved that investors must prepare for the unexpected. Those shocking electoral outcomes produced dramatic and surprising reactions in financial markets.
With that in mind, Barclays warns that an unlikely “Blue Tsunami” that carries the Democrats atop both the House and Senate would be a “negative” for the US stock market.
Without tax cuts and deregulation to look forward to, investor sentiment would be hurt by calls for impeachment and investigations, Barclays argues.
What about the trade war? Barclays says a huge defeat for Republicans could result in vastly different outcomes on trade. It’s possible losing control of Congress would force President Donald Trump to rethink his protectionism. On the other hand, Barclays said Congressional investigations could spark a “more confrontational approach” on trade from the White House.
Morgan Stanley argues that a “blue sweep” in November would be negative for pharmaceutical companies because of heightened risk of a crackdown on drug prices. But the firm said a Democratic House and Senate would be “neutral” for the market overall.
On the other hand, investors may cheer if Republicans maintain control of both houses of Congress. Trump’s pro-business policies of low tax cuts and deregulation would be reinforced.
Barclays called this scenario “very risk positive” because it would “embolden” Trump’s America First agenda and probably lead to more tax cuts.
But there’s no guarantee Republicans would be able to enact Tax Cuts 2.0, especially because fiscal conservatives worry about the surging federal government deficit. Morgan Stanley said that expanding the tax cuts could add more than $500 billion to the deficit over the first five years and put further pressure on the Federal Reserve to raise rates.
“The budget is pretty much tapped out,” said David Kelly, chief global strategist at JPMorgan Funds. “Even the most shameless fiscal expansionist couldn’t justify putting more stimulus into the economy at this point.”
That sounded like a challenge.
No matter how the election turns out, the last decade shows that the stock market can thrive under Republican and Democrats alike. The S&P 500 has almost tripled over the past decade.
“The country is bitterly divided politically. But you shouldn’t let how you feel about politics impact how you think about investing,” said Kelly.
Just ask critics of President Barack Obama who skipped the bull run or Hillary Clinton supporters who sat out the Trump bump.
2. Tariffs troubles? Several companies hurt by Trump’s tariffs will report earnings next week.
Whirpool once called the tariffs a “positive catalyst” for its washing machines, but it has raised costs by hundreds of millions of dollars this year and squeezed its profit margins. The company, which will report earnings on Wednesday after the bell, slashed its profit outlook for 2018 because of the “very challenging cost environment.” Its stock is down 37% for the year
Harley-Davidson, Colgate, Ford, 3M and Caterpillar will also report earnings this week.
3. Tracking tech: This week’s earnings include some tech heavyweights, including Alphabet, Baidu, Amazon and Snap Inc.
For Snap, it could be do or die for the struggling messaging app. It’s dealing with a revolving door of executives, and the stock is down a staggering 53% for the year. Analysts expect the company will report another decline in users when it releases its third quarter finances this week.
4. GDP: Investors will get their first look at third-quarter GDP numbers on Friday morning.
The US economy is still strong. But it’s facing pressure from slower global growth, Trump’s trade wars and disappointing data for housing starts. GDP grew at an annualized rate of 4.2% in the second quarter, according to the Bureau of Economic Analysis.
5. Coming this week:
Tuesday — 3M (MMM), JetBlue (JBLU), Six Flags (SIX), McDonald’s (MCD), Sprint (S), Las Vegas Sands (LVS), Caterpillar (CAT), CA Technologies (CA), Lockheed Martin (LMT), Verizon (VZ), Harley-Davidson (HOG) earnings
Wednesday — Aflac (AFL), Build-A-Bear (BBW), Allegiant Travel (ALGT), AT&T (T), Baidu (BIDU), Boeing (BA), Callaway Golf (ELY), Xerox (XRX), Visa (V), Ford (F), Microsoft (MSFT), SiriusXM (SIRI), Whirlpool (WHR), Wynn (WYNN) earnings
Thursday — Alphabet (GOOGL), Amazon (AMZN), Altria (MO), Ally Financial (ALLY), American Airlines (AAL), Alaska Air Group (ALK), Southwest (LUV), AK Steel (AKS), Spirit (SAVE), Dunkin’ Brands (DNKN), Boyd Gaming (BYD), Stanley Black & Decker (SWK), Sherwin-Williams (SHW), Merck & Co. (MRK), Hershey (HSY), GrubHub (GRUB), Snap Inc. (SNAP) earnings