Analysts warn that history suggests that a sweep of the Democrats or Republicans next November could mean bad news for stocks.
Investors are worried about how the stock market will react to next year’s federal elections. Instead, attention should be paid to expectations that Democrats are on track to control the Senate, where Republicans currently represent a majority, or that Republicans are on track to regain it.
“Fear of such a unified government outcome on Election Day 2020 is substantial at the same time that confidence, so very important to markets and economies, remains fragile albeit stabilizing,”, said analysts. They also pointed out that survey data and other indicators show that executives remain cautious about the future and are reluctant to plan, especially with regard to capital spending, especially as the trade war has really affected business.
Analysts at Goldman Sachs, meanwhile, warned in a note released on Monday that political constants do not necessarily hold in investing.
” In the United States, equity returns during periods of divided federal government have typically exceeded returns achieved when one political party controls the White House, Senate, and House of Representatives”, Goldman Sachs analysts said. ” Since 1928, excluding recessions, when the federal government was controlled by a single party, the S&P 500 median 12-month return equaled 9%. However, the median return under a divided government was 12%.”
Goldman Sachs said it expects the bull market in US stocks to continue in 2020, with a persistent profit cycle and continued economic growth to raise the benchmark for the Standard 500 by 5% to 3,250 points as early as 2020. They said the rise was “political and policy uncertainty”. This will maintain the record set for most of 2020.
After analysts pointed out that many Democratic candidates called for a reversal of the 2017 tax cuts, Goldman analysts said the federal government could push investors to reverse the tax cuts and lower projections for 2021 in Standard 500 earnings per share to $162, a Decrease of 7%, doubling the profit rate to 16%.
Tim Moe, Goldman’s chief equity analyst of Asia Pacific warned in an interview with Bloomberg that the likelihood of a return to corporate tax retreat for 2017 by the United Democratic Government could become a spark that could reach a 20% correction.
Julian Emmanuel, head of shares at BTIG, has revealed the fear of a sweep by either party on the Standard 500, which shows instruments that give the owner the right but not an obligation to sell the index at a specified price before a certain date. This gives the holder the right but not the obligation to purchase at a specific price before a certain date.
While investors may be nervous, stocks climb to the so-called anxiety wall. The S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite Index hit a record high on Monday. The S&P 500 has reached 25 per cent so far this year, with recent support tied to the upbeat outlook for the so-called first-stage trade agreement between the United States and China.