This year, Tuesday, November 8 is a very important date on the calendar. It is the day of the midterm elections. It is critical not only for Americans but also for the global capital markets. Especially in Israel, where a large number of businesses rely on how well the US economy performs.
According to current surveys, Republicans are likely to take control of the House of Representatives and maybe the Senate, therefore ending Democratic dominance of the legislative branch and potentially resulting in a period of gridlock in this body of government.
In some countries, where the legislative branch is unable to perform its function, and no coalition is formed, it will lead to an election (or five such elections as it happened in Israel). However, the US legislature is unique and regardless of the outcome, it will continue functioning its entire term. If the above scenario were to take place, it is not actually a bad thing for the stock market. Stalemate situations tend to maintain the status quo while reducing uncertainty. This is always welcomed by markets. However, the composition of the next Congress will be especially important in determining the future route of specific industries, such as healthcare, green energy, the oil & gas sector and technology.
The loss of Democratic control of the legislative branch will make it more difficult for Biden to enact his plans. Should Republicans take control of the United States Congress, they will be able to carry out their policies. This seems like a perfect scenario for Republican-backed sectors which traditionally associated with oil, biotechnology, defense, and pharmaceuticals.
Let’s look at some of them and see what repercussions we should, as investors, anticipate after all the votes have been tallied.
It is not a secret that businesses prosper when there is an excess in demand for the products or services they provide. This is precisely what is happening right now in the defence industry. Tensions are on the rise in a number of regions due to various factors, including those involving China and Taiwan, the war in Ukraine, proxy warfare involving Iran in the Middle East, and others. This unquestionably increased demand for American military equipment. So, if the Democrats keep the House, that’s good news for the defence industry in the foreseeable future. However, if Republicans manage to win the House, it will send shock waves across the sector. For one, they don’t seem eager to keep giving the Ukrainian government the same amount of money they’ve been getting. They are more concerned with domestic issues and are reluctant to confront Russia. Therefore, it is safe to assume that companies and investors in the industry will feel the repercussions of legislative shifts.
Investors’ attention may be drawn back to Trump-era tax breaks that expired last year. Should it be reinstated, corporations with substantial R&D expenditures will be able to claim these expenses in full in the year in which they occurred, rather than attempting to minimise their tax liability with their assistance in five-year cycles.
In addition to that, the largest companies Amazon, Apple Google and Facebook have long been regarded as potential regulatory targets. Indeed, the White House hopes to introduce antitrust legislation the American Innovation and Choice Online Act after the elections in an effort to advance the issue.
Investors in pharmaceutical companies are keeping a close eye on this election as results are expected to have far-reaching consequences on the entire sector due to legislation addressing drug pricing. The Democrats’ proposed Inflation Reduction Act would make it possible for Medicare, the state health insurance programme, to negotiate the price of various prescriptions. This reform is being sold to the public as a revolutionary one that will drastically reduce the cost of medicine. As a result, many Israeli equities listed on the Nasdaq, particularly industry titans such as Merck and Pfizer, are likely to face the brunt of any changes on Capitol Hill. Republicans have been fighting against this legislation, and their victory will certainly help pharmaceutical stocks in the short term.
Chinese stocks traded in the United States
There is bipartisan support in relation to tackling the issue related to lack of transparency when it comes to the listing of Chinese companies on US stock exchanges. The idea of delisting such companies gained traction during former President Donald Trump’s tenure. This support, combined with rising geopolitical tensions with China and the imposition of curbs on the semiconductor industry, contributed to a 39% drop in the Nasdaq’s Golden Dragon Index this year.
So far, the Securities and Exchange Commission has identified 200 equities that could be delisted from US exchanges if they fail to meet transparency rules.
Should Republicans gain control of the Senate and the House, the extent of regulation of Chinese corporations would certainly rise, sparking debate over the reports whether they should be permitted to trade in the US at all.
The status quo would bring a sigh of relief to the sector. The Democrats just passed $369 billion climate package, the greatest investment of its kind in US history, which includes substantial long-term subsidies for clean energy. Should this legislation stagnate due to the midterm elections, green energy companies in the field (i.e. Israeli SolarEdge and to some degree smaller players listed on TASE) could miss out on these investments.
Oil and gas
It is expected that energy policy will undergo significant changes if Republicans win either the Senate or the House. They continue to be strong proponents of fossil fuels, especially after the US became a net exporter of oil during Trump’s presidency and the price of petrol fell to near-historic lows. This is probably why the high price of gasoline remains one of the sensitive issues in this election. Biden administration, on the other hand, continues to lean towards the alternative energy and is not interested in developing the oil and gas sector. In fact, after the Biden administration announced that oil corporations’ earnings would be taxed, their stocks plummeted.
The energy sector is one of the few market winners this year, thanks to the increase in oil and natural gas prices as a result of recovery from the global pandemic and war in Ukraine.