Midterm elections: bull market friend or foe?

Early voting has already started, but the majority of the US go to the polls tomorrow for the midterm elections. History tells us that the incumbent party usually loses seats at this time. What would a shift in the balance of power mean for the US stock market?

If the Democrats won back a number of seats and, importantly took control of one of the houses, it could have meaningful implications for fiscal policy but, perhaps more importantly, foreign relations, which have been thoroughly tested by President Trump.

However, a Democrat majority could lead to more uncertainty in the form of a possible impeachment and potential government shut-downs.

It is also worth noting that the one promise Trump has kept is to put American first. This sentiment and the fact that his tax cuts are still being felt in a positive way, could mean he gets more votes than expected. Voters are more likely to support him if they are feeling better off.

Three reasons the bull market may get a final boost

• The US economy is still looking strong
• The US is home to some of the world’s best companies with the highest returns on capital
• US companies are still making profits; earnings are still broadly positive

Three reasons it may not

• QE has ended and with it, the support/tailwind the stock market has enjoyed for a decade
• Valuations are high, even after the sell off and any disappointing results are being punished
• US corporates have taken on more debt, so as interest rate rise, their cost of borrowing goes up and some may struggle to pay.

Three funds to consider

Taking a direct bet on the US right now may not be the best move, but there are a number of global equity funds that have a decent weight to US companies, while at the same time being selective.

1. T. Rowe Price Global Focused Growth Equity (63%* weighting to US companies): this fund invests in a diversified selection of global companies, which the manager believes have the potential for above-average and sustainable rates of earnings growth. The companies may be based anywhere in the world, including emerging markets. The manager builds a portfolio based on key themes to create a global equity fund with considerable potential for delivering long term returns across all market conditions.

2. Fidelity Global Special Situations (55.4%* weighting to US stocks): This is another fund designed to deliver consistently throughout all market conditions. Manager Jeremy Podger, invests mainly in larger companies and uses the breadth of Fidelity’s global research team to highlight what he sees as being the best ideas from around the world. It has a solid but flexible process.

3. Guinness Global Equity Income (42.8%* weighting to US stocks): This fund is equally-weighted, meaning the same amount of money (3.5%) is invested across 35 stocks. The managers focus on how well and consistently a company can use money to generate returns. They also have substantial freedom to entirely avoid countries and sectors they don’t like. The one-in, one-out philosophy means the fund stays up to date with the managers’ best ideas.

*As at end Sept 2018