Following up on the US midterms

A divided government

The US now has a divided government for the next two years, in line with the main scenario in Vontobel’s recently published White Paper that analyzed the various potential scenarios. Even with the House in the hands of the Republicans, the majority is by a much narrower margin than many had anticipated. While it does increase the risk of gridlock in US politics, the obstacles for President Biden to get new laws passed aren’t as restrictive in this situation as he may get some help from moderate Republicans. Investors can be reassured, with big changes to fiscal spending or significant changes to tax policies unlikely.

Split Congress – the caveats

Still, there are some caveats to this scenario. On the one hand, if the US economy were to slip into a recession, securing congressional blessing for swift additional government spending to support the economy becomes more difficult with a split Congress.

Republicans may face a conflict of interest between supporting the economy and increasing their likelihood of seeing a Republican president take over in 2024, as incumbents dealing with a recession usually see their chances of reelection hampered.

On the other hand, it carries the risk of a temporary government shutdown in 2023 as Republicans are likely to obstruct the budget reconciliation process, which usually has a temporary negative impact on markets.

Additionally, since we also didn’t see a blue sweep, Democrats taking a conflicting approach to the US central bank with proactive fiscal and regulatory support is now also unlikely, easing some investor concern.

Presidential elections 2024

Investors were also keeping a close eye on a possible red wave and on Trump-supported candidates in the midterms, looking for indications of how strong his standing is within the Republican party. The results in some key states were a poor showing for his candidates: In Pennsylvania, Doug Mastriano lost to his Democratic counterpart in the gubernatorial race, while Mehmet Oz’s defeat to his Democratic rival led to a flipped Senate seat. Other candidates Trump backed, such as Kari Lake’s gubernatorial run in Arizona, also floundered.

It’s worth noting that most of the defeated candidates backed by Trump conceded gracefully and accepted the election result. This is a positive outcome for markets, as it reduced uncertainty around the election process and bodes well for any outcome of the upcoming presidential elections.

Even so, a mere week after the midterms, Trump announced he’s running for president again in 2024. One to watch is Ron DeSantis, who was reelected governor of Florida in the midterms by a large margin, and who stands out as “Trump Lite.” He may well dare venture a presidential campaign to take on Trump. Crowds cheered “two more years” at his election night party.

It now remains to be seen if the Republican-controlled House will resolve the “January 6 Committee,” which is currently investigating Trump’s role in the attack on the US Capitol days before President Biden’s inauguration.

Impact on geopolitics

Overall, a meaningful change in US foreign policy seems unlikely after the midterm elections as there are strong bipartisan views in relation to defending the US’ position as a global leader.

However, a Trump presidency or a “Trump-wing”-Repulican presidency would potentially challenge the current consensus in US foreign policy. Trump’s announcement doesn’t mean he’s the Republican nominee yet. But, as stated in our White Paper, such a scenario could have implications on geopolitics. During his first presidential term, Trump threatened to withdraw the US from NATO and halted US funding to the World Health Organization at the height of the pandemic. That’s why he’s considered the potential candidate most likely to trigger increased uncertainty in  US foreign policy, especially as it’s unclear how he’d act as the war in Ukraine continues. His reelection could create a vacuum, which could be used by other global players with strong geopolitical ambitions,
such as China and Russia.

Having said that, a lot can happen during the next two years, and for now, the midterm results did not hamper Joe Biden’s geopolitical standing, which speaks for a continuation of the current US foreign policy that aims to secure its global leadership role.