The highly anticipated midterm elections have now arrived, and the results could potentially have a major impact on financial markets. Gold is trading slightly lower in early action today, as stocks move slightly higher. Price action appears to be on the calm side for now as investors eagerly await the election results.
What if Democrats Win?
Perhaps the biggest question on peoples’ minds is how a democratic victory may affect the markets. The democrats had an edge in the polls coming into election day, and unless there is a major shift today they appear likely to retake control of the House of Representatives.
A democratic victory could potentially be very bullish for gold while possibly being very bearish for stocks and the dollar. Here’s a brief synopsis of how that could play out:
The Stock Market
It is undeniable that stocks have seen a very strong run higher since Trump took office. The loosening of regulations as well as a pro-business agenda have driven corporate investments and profits higher. Companies have also taken advantage of the administration’s tax cuts and rewarded employees, made additional business investments or bought their own stock back. This has fueled fresh all-time highs in equities despite rising rates and an aging bull market.
Some analysts have suggested that if the democrats take control of the House, they could look to tighten regulations again. Recent discussions of another tax cut would also likely disappear. Companies could be less inclined to reinvest profits and continue hiring. Stocks could, therefore, see a sharp sell-off in the weeks and months ahead.
The dollar index, which for much of the past year has kept a lid on gold prices, could also decline if the democrats retake the House. President Trump would likely face fierce opposition to his agenda for the remaining two years of his first term in office, and the result could be akin to policy gridlock. If economic output were to decline with a democratic House, the dollar would likely decline as a result. The greenback is currently backing off from a 16-month high, and could come under further pressure as election results begin to trickle in.
Will Markets Behave Like They Have in the Past?
From a historical standpoint, stocks have shown a strong tendency to rally after the midterm elections. This is certainly a possibility. If stocks continue to march higher following the election, gold could have a challenging time moving significantly higher from current levels. This election, however, does not seem to be a typical election but rather a referendum on President Trump’s performance. Not only that, but some analysts have suggested that things are not quite as great as they seem. In a recent article from cnbc.com, economist Robert Shiller acknowledged that earnings and growth have been solid. He questioned the sentiment around the numbers, however, stating "It's partly the Trump narrative. He promised to make America great again, and the economy is growing," he said. "It's not as outrageously good as some people would have you believe."
If stocks do begin to waiver following a democratic victory, the declines could be severe. The market has covered a lot of ground in recent years and could have a long way to fall. The potential combination of weaker stocks and a weaker dollar could be the perfect recipe for higher gold as investors seek out its perceived safety.