With some bit of relief, I am glad to see the mid-term elections now behind us as another cloud of uncertainty is removed. However, in reality, I suspect the outcome of the elections will have much less impact on the markets than most currently think.

Barbara Kollmeyer penned a note earlier this week for MarketWatch:

“For financial markets, one takeaway mattered above all others in the midterm election—no curveballs.

And that’s basically what was delivered as pundits who got it so wrong in 2016, correctly forecast the end of one-party rule this time. With Dems calling the shots in the House, we could see no end to investigations, subpoenas and possibly impeachment talk and a hard push for POTUS to cough up those tax returns.

All that may slow down President Donald Trump’s MAGA plans.”

While that is entirely true, I think the markets are going to quickly look past the now “gridlocked” Congress to the more important drivers of the market – earnings and share buybacks.

As I noted in yesterday’s missive on rising headwinds to the market, earnings expectations have already started to get markedly ratcheted down for the end of 2019.

More importantly, beginning in 2019, the quarterly rate of change in earnings will drop markedly and head back towards the expected rate of real economic growth. 

(Note: these estimates are as of 11/1/18 from S&P and are still too high relative to expected future growth. Expect estimates to continue to decline which allow for continued high levels of estimate “beat” rates.)

So, really, despite all of the excitement over the outcome of the mid-terms, such is really unlikely to mean much going forward. The bigger issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.