The mid-term election results had something for everyone. Trump was able to claim a victory as Republicans gained seats and held on to their majority in the Senate. Meanwhile, Democrats took control of the House of Representatives, claiming victory there. Although both the Republicans and Democrats have talked about a bipartisan approach, the divide is such that it may be difficult to come to an agreement on anything. That said, a lack of political action is not necessarily a bad thing for markets and, having removed one uncertainty, equity markets reacted positively to the result. The November Federal Reserve ("Fed") meeting has also passed, as expected, without a change in policy. However, fears over politics and interest rates are not over.
The Fed is expected to raise US interest rates on 19th December and an additional three times next year. On this side of the Atlantic, Brexit negotiations appear to be nearing a close with the European summit on 21st November as a key date. However, any deal may then run into problems getting through the UK Parliament. At the upcoming G20 meeting, the focus will be on the ongoing trade war. In the lead up to this we will be watching Trump's tweets with interest. The Italian budget has been rejected by the EU and no doubt will continue to be a subject of contention for some time. For those with a pessimistic nature, there are plenty of things left to worry investors for the remainder of the year.
For the less pessimistic, we could see a US-China trade deal, concluded Brexit negotiations and the Italians agreeing a budget with the EU. With the Fed rate rises largely priced in, any moderation of its language on rate rises would be seen as positive for markets; a recipe for happy investors and the so-called "Santa rally". My own view is to try looking through the political noise and focus on what companies are doing on the ground. In this respect, nearly 90% of companies in the S&P 500 Index of US stocks have reported their latest quarterly figures, showing earnings growing 27% off the back of tax cuts and sales up over 8% over the year. These figures, combined with the strong US economy, allows the US equity market to continue to be attractive to investors. International investors put off by uncertainty around Brexit have shunned the UK market. When there is some clarity about the direction of Brexit, given companies are trading at just 12 times earnings and on a dividend yield of over 4%, I expect investors will want to return to the market.
To conclude very briefly, there are plenty of reasons for markets to remain volatile for the remainder of the year but there are also plenty of reasons to remain positive.
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