Although analysts have also made misjudgments in the past, many observers expect that the Democratic Party will regain some political influence in this week's mid-term elections. Nevertheless, Wall Street still predicts that U.S. President Donald Trump will move forward with some of his less popular policies after the voting.
As of press time, a poll conducted by Harvard University indicates that the Democratic Party has a 96% chance of winning the House of Representatives, and a 78% chance of winning both the House of Representatives and the Senate.
Goldman Sachs sent a letter to clients this morning stating that if Democrats gain more influence in Congress, it is expected that Trump will raise tariffs. Economists Alec Phillips and Abhay Duggirala said: "The Democrats have indicated that they will seek to reverse some of Trump's tariffs, but we expect this to have only a limited impact, as the reversal is likely to target only a few countries (such as Canada) or a few products."
"We expect Trump to announce new tariff increases after the election, which will be sufficient to offset these reductions, ultimately resulting in an increase in the effective tariff rate for the United States of less than 2 percentage points."
Tariffs are also likely to become an increasingly important source of revenue in the coming months. For example, the conflicts in the Middle East are resulting in high costs, and this is happening against the backdrop of U.S. national debt reaching 40 trillion dollars, with budget hawks calling for a reduction in the deficit from the current GDP 6% to 3%.
However, James Smith believes that any effort to reduce the deficit could reach a deadlock in a more divided government. He writes that a fiscal deadlock is likely to draw the market's attention back to trade policies and how to extract more revenue from import relations.
“Do you still remember the tariffs?” Smith wrote. “After the Supreme Court overturned Trump’s emergency tariffs, the initial temporary 10% across-the-board tariff rate was ultimately replaced by a more permanent structure under Section 301. Since then, this issue has significantly faded from the agenda.”
Iranian Actions
The White House's course of action in the Middle East after the midterms remains an unsolved question. According to Paul Donovan, once "no longer bound by public opinion," the president may take tougher actions in the Gulf War.
According to a study by the Pew Research Center last month, only 14% of voters expressed strong approval of the way Trump handled the military conflict with Iran, while another 20% said they “relatively” approved. As voters lose interest, Trump’s motivation to continue this conflict is now limited to national security and his personal political legacy.
Donovan said, "The market will want to focus on the Republican Party's reaction to the results. Could the Republican Party split over MAGA related issues? Could Trump escalate the hostile actions in the Gulf War and bring about broader economic consequences both domestically and internationally?"
More broadly speaking, the cost of undertaking this action is gradually evolving into a long-term disagreement regarding the future of government spending. Recent reports on the costs of the war in Iran have risen to $47 billion, while this conflict was initially described as lasting for a few weeks; it has now dragged on for several months.
Deutsche Bank wrote to customers on Friday, stating: "It is very likely that the Republican Party will push for a coordinated bill along party lines in the coming weeks, which could significantly increase defense spending and may also address the debt ceiling issue, which must be resolved by the end of next summer/early autumn. Additionally, please note that federal government funds will be depleted on December 11th, which will require bipartisan support to pass a continuing resolution in order to avoid a government shutdown."
On September 2, Trump signed the "Continuing Appropriations and Extension Act," providing funding for federal agencies until December 11, for a period of 72 days.
