Mid-term elections loom

There is no shortage of items on President Trumps agenda. However, his attention will now be resolutely focused on the mid-term elections taking place in just two months’ time.

Mid-terms occur every two years. Ironic perhaps, but they were introduced by the founders of the United States to ensure continued political vigour! During this fractious time the main political parties will be battling for control of the US bicameral Congress (split into 2 Chambers) and the legislature power which comes with that. This is a key event because losing majority control of Congress would weaken Trump’s ability to implement policy and fulfil his unconventional agenda. It would also enable Democrats to start impeachment investigations into his administration.

Historic precedent since World War II indicates parties loose on average 25 of the available 435 seats in the House of Representatives, this was seen with Obama in the 2014 midterms where he lost 63 seats giving the Republicans a majority. On this occasion the Democrats need only gain 23 seats to take control of the House from the Republicans so Trump has a big task ahead of him if he wants to keep getting his own way.

Voter participation in the mid-terms tends to be lower, at around 40%. Republicans tend to have the largest turnout, which often works in their favour. However, this time Democrats may be swayed to come out and vote in protest and to express their obvious distaste of the President. His policies on immigration, ‘the wall’, the environment and the threat of trade wars have caused great angst among Democrats.

Trump on the other hand is likely to focus on his economic achievements. His “America First” and pro-business stance has worked to the advantage of many Americans. One of the most important aspects favouring an incumbent President is the state of the economy – as the famous political saying goes- ‘It’s the economy stupid’.

The areas where Trump is on potentially winning ground are as follows:

Business:

• Tax reform implemented in January reduced corporation tax rates from 35% to 21%. This has been well received.

• Continuous signs of improving financial health of business; 99.0% of companies have now reported Q2 earnings and 80.0% of the figures continue to beat analyst expectations by 5.0%.

• Blended S&P 500 index average Q2 earnings growth stood at 25.0%, compared to 7.0% in Europe

• Firms are expected to use the benefit of the stimulus to increase capital expenditure thus continue to grow.

S&P 500 Q2 Earnings Growth

Source: Bloomberg, September 2018

Markets:

One of the biggest indicators of Trump’s claim of an improving US economy is an advancing stock market. The chart below demonstrates 36% growth in the S&P 500 index since his election.

• In the 22 months prior to the US election market index growth was 26.4%.

• In a global context, the MSCI World index shows global markets were up much less, by 24.4%, during the same period (and a big part of this growth is from the US which makes up 50% of the index!)

• Taken together, Trump says it is evident that value has been added through policy.

S&P 500 Index Growth

Source: Bloomberg, September 2018

Unemployment:

Trump is also likely to highlight enhancements in the job market.

• Unemployment is at an 18 year low in the States (3.9%)

• President Trump claims to have added 3.4 million jobs since his election stating, “Our economic policy can be summed up in three very simple, but beautiful words: jobs, jobs, jobs”.

• Real incomes are yet to catch up suggesting the traditional Philips Curve relationship has not yet taken hold, but the labour market overall looks very strong relative peers such as Europe (unemployment at 8.2%).

The Trump debate is heating up. However, he has a wealth of positive statistics to demonstrate improved the health of the economy as he heads into the mid-terms in a battle to maintain legislature power in Congress.