Canada

As the U.S. midterm elections approach and volatility increases, many investors are wondering what the future will hold for the markets. Will there be a change in power in Washington D.C? What might its impact be? Will the Federal Reserve make a policy misstep that negatively impacts the economy?

At BNY Mellon Wealth Management's recent event in Atlanta, Chief Investment Officer Leo Grohowski moderated a panel of policy and investment experts as they discussed these topics and more.

Volatility has been elevated lately, as concern about U.S. interest rates and the midterm elections grows. What do you expect for the markets going forward?

Alicia Levine, Chief Strategist, BNY Mellon Investment Management

I think we should expect some more volatility from mid-October through the end of November, given the impact of the elections and other headwinds. But eventually, I expect that solid fundamentals will help equity markets regain their footing.

What's the expected outcome of the midterm elections as of right now?

Terry Haines, Senior Political Strategist & Head of Political Analysis, Evercore ISI

We expect that Democrats will take a slim majority in the House of Representatives and that Republicans see a small increase in their Senate majority. In the short term, the markets may react negatively — there's a perception that political instability will increase and that the administration's pro-growth policies, such as the tax cuts, may be rolled back. But I think that only becomes marginally more likely and that over time markets will rebound modestly once that becomes clearer.

Leo Grohowski, Chief Investment Officer, BNY Mellon Wealth Management

Were Democrats to surpass expectations and take both chambers of Congress, you could see greater market volatility, as investors will be worried about potential tax changes and a halt in the administration's growth-oriented policies.

Is a divided government a positive or a negative for the markets?

Terry Haines

A divided government is a return to the configuration we saw for much of the Obama administration. Markets thought that was a positive then, and will probably see it positively now, as well. Not much will change, but there will be a lot of discussion about potential changes on taxes, infrastructure and housing finance. So even though we may see little legislative action, there will likely be short-term volatility in the sectors that are the subjects of these debates.

Leo Grohowski

In a divided government, we don't expect major policy changes that would impact how we allocate capital within a well-diversified portfolio, which is the most important decision we have to make.

Paul Vittone, Managing Director, Head of Private Equity, BNY Mellon Wealth Management

The impact on private markets will likely be muted. They got everything they wanted — lower individual and corporate tax rates — after the 2016 election, at relatively no cost.

Can you think of any potential policy changes that the markets might be missing?

Terry Haines

Drug pricing could be a major sleeper issue. President Trump has signaled his openness to addressing it and it's also a major priority for Democrats and the public at large. It could be a combustible confluence of political and policy concerns and would be a negative for pharma and bio stocks in 2019.

Fear of a policy mistake by the Federal Reserve is the latest in the list of worries for the markets. Are you concerned that the Fed is behind the curve or may tighten too fast?

Alicia Levine

The Fed has telegraphed its plan to get to neutral — the rate that's needed to keep the economy at an even pace and that is neither accommodative nor restrictive. Six weeks ago, many thought the Fed was behind the curve, with inflation beginning to rise. But now, the market is concerned that the Fed is tightening too much even as still positive growth slows and earnings normalize after the big tax cut bump. Currently, economists are a lot more optimistic about the economy than investors, and that's usually the opposite. With the economy appearing healthy, unemployment low and inflation under control, some may think the Fed is going too far. Our view is that the Fed will avoid an overly restrictive policy stance and remain data dependent, but as fiscal stimulus begins to fade we may begin to see dampening effects from rate hikes on the economy. But that's a few years out.

Leo Grohowski

Overall, the U.S. economy continues to look strong. Rising interest rates will make it harder for some consumers to repay debt, but it's not a major problem yet, and the Federal Reserve is currently doing a good job of steering monetary policy.

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