We don’t know much for sure about the Trump administration’s near daily windmill tilting, but what we do know with absolute certainty is that the increasingly aggressive trade rhetoric is designed to bolster the GOP ahead of the midterms.
Analyst after analyst, strategist after strategist have all said the same thing: Trump’s reinvigorated push to squeeze Beijing on trade is more political gambit than it is anything else, as he needs to rally his base and check boxes on the MAGA agenda in order to dispel the idea that tax cuts for corporations and the wealthy aside, he hasn’t really managed to get anything done, despite Republicans controlling the entire government.
The latest polling from ABC/WaPo shows Democrats’ assumed advantage in the midterms fading since January, when they enjoyed a 12-point lead on a generic congressional ballot. That lead has now shrunk to 4 percentage points.
As far as markets are concerned, it’s probably reasonable to expect folks to be a bit more nervous this time around than they’ve been ahead of midterm elections in the past. Recall the following from JPMorgan’s Marko Kolanovic who last month noted that because the tariff bombast is more political gamesmanship than it is an effort to shape the future of global trade and commerce, investors shouldn’t be overly concerned about the prospects for an all-out trade war:
Let’s note that there is a large asymmetry of the outcome rewards by participants. A significant trade war started by this administration would destabilize global equity markets. Should this happen ahead of the November election, it would impair the administration’s ‘market scorecard’ and likely lead to an election loss. Lost elections open a path to impeachment, and other complications.
So ironically, Trump needs to turn the trade balderdash knob up just loud enough to let his base hear it, but not loud enough to spook Wall Street into dumping equities en masse. Because thanks in no small part to the fact that Trump has gone out of his way to make himself synonymous with the stock market, it’s likely that a crash precipitated by an acute escalation in trade tensions would overshadow whatever political points he would score by getting “tough” on the Chinese. And all of that is to say nothing of the real-world economic impacts of tariffs on downstream industries in the U.S. and the deleterious effects of Chinese countermeasures on sectors like agriculture.
The overarching point from Kolanovic’s assessment was that if “how’s your 401k doing?” (a tagline Trump began testing out late last year as markets continued to rally) turns into a standing joke as opposed to bragging rights, it could deep-six the GOP’s chances, opening the door for Democrats and raising the odds of Trump being unceremoniously ousted.
That brings us neatly to a new note from Goldman which explores market performance around historical midterm elections and although there’s a lot to parse, the 30,000 foot view is as follows:
During 11 midterm election years since 1974, the S&P 500 typically rose 3% through April, traded flat through September, and then rallied by roughly 10% from October through year-end as uncertainty declined.
Yay! We can look forward to a double-digit-ish rally to close out the year if history is any guide.
The problem: history is probably not a great guide because as it turns out, Americans decided to let Donald Trump play President on the TV, which makes him feel like a super-special big boy!
Here’s Goldman again:
In contrast with the typical experience, however, the current political environment suggests that uncertainty and volatility may remain elevated post-election given the likelihood that a divided government leads to an increase in congressional investigations.
There’s a lot more to the bank’s analysis than that (think: sector level ramifications stemming from different legislative combinations), but the point for the broader market is that in case you haven’t noticed, everyone is already investigating everyone else inside the Beltway. If we get a divided government post-election, well then it’s at least possible that the situation is going to become even more comically absurd. So I’m not sure betting on the “traditional” 10% post-midterm rally is going to be a great idea.
Trade accordingly. Or don’t. Whatever.