Infrastructure or Impeachment?

 

With the mid-term elections behind us some of the clouds of uncertainty are clearing for investors, but others are gathering.  It wasn’t a “blue wave”, but Democrats did wrest control of the House of Representatives fueled by suburban dissatisfaction with President Trump. The Senate remained in Republican hands, thanks to Trump’s tireless campaigning.  Maintaining leadership of the Senate ensures that the President’s business-friendly legislation, like the corporate tax cuts and reduced business regulation rolled out over his first two years in office, will remain intact.

Expect a cabinet shakeup. It’s widely assumed that Attorney General Jeff Sessions will be bounced, perhaps within days. President Trump has berated the former Alabama senator since Sessions recused himself from the Mueller investigation.   According to the Wall Street Journal, Trump has five potential successors in mind.  Defense Secretary Mattis, one of the longest-standing cabinet members, could also be ushered out the door.  President Trump derided Jim Mattis recently, calling him a “sort of Democrat” on CBS’ “60 Minutes,” adding that “he may leave.”

With Democratic control of the House, it’s likely that up to five cabinet members could become the subjects of investigations. Interior Secretary Zinke could face scrutiny on travel spending and his relationship with Halliburton. HUD Secretary Ben Carson could be accused of politically motivated promotions and lavish government spending, including $31,000 on a dining room set for his office (the order for which was subsequently cancelled). Homeland Security Secretary Nielsen could suffer backlash for enforcing the separation of immigrant families at the border. Commerce Secretary Ross could face scrutiny for financial conflicts, and Education Secretary DeVos for being uninformed and ill-equipped for the job.

It’s widely expected that Americans will soon learn the conclusions of Robert Mueller’s 16-month Russia’s election interference probe.  Not wanting to unduly influence the political process, Mueller and his team have chosen to wait until after the midterms to reveal their findings. So far Mueller has accumulated six guilty pleas and a jury conviction during his investigation. The results announcement could have a significant impact on the market.

Looking ahead, what will be the legislative agenda this term?  Clearly, President Trump needs a fiscal accomplishment and infrastructure could be it. Given the $1 trillion deficit, it would be virtually impossible to pass infrastructure legislation without including the private sector. The public/private partnership imbued in the Qualified Opportunity Zone statutes of his recent corporate tax package could, however, serve as a useful blueprint for upgrading America’s neglected roads, bridges and airports. Employing a favorable blend of private capital and generous tax incentives could get several long-overdue projects off the ground. It’s difficult to know if Democrats would go along with privatization of infrastructure and the tolls and user fees that come along with it, but a recent Wall Street Journal story examined the use of upfront payments from the private sector in exchange for long-term leases on fee-generating infrastructure and employ the capital to repair long-forgotten roads and bridges. The report estimates that long-term leases on the 61 largest US airports alone could generate $250-360 billion in upfront payments.

Impeachment proceedings, on the other hand, could be a legislative impediment. While Nancy Pelosi asserted that impeachment isn’t a policy agenda, impeachment proceedings could wind their way through the House in the coming months. Since House impeachment charges ultimately require Senate convictions, the possibility of unseating President Trump would be remote without damning evidence from Mueller. Nonetheless, impeachment hearings would expend resources for nothing more than political arm flapping.

Historically, equity markets rally in November and December and mid-term years are no different. Since 1946, stocks have risen an average of 17 per cent in the year after a mid-term election, according to MarketWatch. In fact, over the 12 months following the 18 midterm elections since 1946, stocks were higher every single time.  The bottom line for the markets is that investors have historically embraced congressional gridlock. According to a CNBC report, the S&P 500 has enjoyed a 12 per cent average annualized return for the combination of a Republican president and a split Congress. Given that historical backdrop, and the likelihood of interest rate normalization, we consider any significant market advance as an opportunity for risk reduction.