By Jeffrey Schulze, investment strategist at the Legg Mason affiliate ClearBridge Investments
The S&P 500 should continue to march higher for the rest of 2018 and into 2019. The prospect of a U.S. recession remains below the horizon…for now. The change in congressional leadership could lead to increased volatility for the market broadly, particularly as it relates to government shutdowns and debt ceiling raises.
The good news: history shows stocks have performed strongly after mid-term elections. Stocks were up in the 12 months following each of the last 17 midterm elections going back to 1950. Stocks have historically performed much better than average in the three-, six- and 12-month periods following midterms. While it may feel like this time is different, history would suggest it rarely is.
What does we expect from the White House in the near term? Trade/tariffs will continue to be a focal point. The election outcome means major changes to the Affordable Care Act and drug price controls are less likely, which should be a positive for biopharmaceutical stocks.
And the administration’s deregulatory efforts will likely slow but not stall. This should help keep business confidence high, as company managements will have more certainty of a continued deregulatory operating environment. In turn, this should help to sustain the pickup in capital spending. While the benefits are broad-based, continued deregulation should benefit financials and energy names the most.