The Democrats took victory in the US midterms, winning control of both the senate and the house. A blue wave saw the Democrats win seats in areas previously thought of as safe Republican strongholds.
When America sneezes the world catches a cold, so what does the result mean for investments in the US and further afield?
What it means in the short term
In the short term, we don’t expect to see immediate changes. While the Democrats will have control of congress, Trump can still veto any laws brought before him. He’s indicated he’d be willing to work with them, but concessions could be hard won.
Foreign policy also largely remains under the control of Trump, and that’s where he’s caused a lot of pain worldwide.
Tariffs, the war with Iran, reversals on Ukraine, and increasing demands on allies have all weighed on oil prices, inflation and interest rates worldwide. Could the result cause him to take a more pragmatic approach to foreign policy? As it’s the one area Trump retains significant influence over, he’s just as likely to maintain or even intensify his current approach. Either way, these problems won’t go away overnight.
What it means in the long term
One of the key factors for voters was AI. With the Democrats in charge, we could see tighter regulation and difficulties in building new data centres, which could weigh on AI investments.
New Democratic Governors could try to block data centres in states like Texas, disrupting individual data centre projects. Putting broader federal constraints on all planned data centres would need to get past Trump’s veto. The possibility of higher corporation and top-rate taxes would also impact big tech.
Increased scrutiny of the Iran war could ultimately see additional military funding challenged and renewed pressure for a diplomatic solution to end the conflict. This could impact defence companies and perhaps lead to lower oil prices and global inflation over time.
Government borrowing could also be made harder with a democratic congress, as the government could struggle to approve more spending. This could be a positive for US Treasury Bills and US inflation.
The market reaction
Markets experienced some initial volatility reflecting uncertainty in AI regulation, defence spending and fiscal policy. However, both the S&P 500 and Nasdaq were up on the day.
Tech names Amazon, Microsoft and Apple grew with the results, but other AI-linked companies saw losses. Space X and Tesla were down and while this may be due to AI concerns, it could also be linked to Elon Musk’s direct financial involvement in the elections.
Brent Crude prices dropped to just under $95 a barrel while clean energy shares were buoyed.
The US dollar fell amid concerns that tighter AI regulation could hamper US growth. But bond markets seemed to react positively, with yields on Treasury Bills falling. Together, these caused the gold price to increase to $4,047.57.
Parmenion Investment Management’s position
We don’t see the mid-term election news as a reason to change anything in our portfolios. If anything, it gives us further conviction in our approach.
We’ve previously taken steps with our asset allocation to avoid over exposure to AI stocks as markets became increasingly concentrated towards a handful of names.
Elections can create short-term uncertainty, but successful investing is rarely about predicting political outcomes. It's about building portfolios that can adapt to a range of economic and market environments.
That's why diversification remains at the heart of our investment approach. Helping clients whatever the headlines say, rather than trying to predict which headline comes next.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
