Topped Trump!!! - Global market update

Born in Iowa but raised in Kansas, George McGill was elected to the United States Senate on November 4th 1930 to replace Charles Curtis who resigned to become vice president of the United States. In the Senate, he was the chairman of the Committee on Pensions and was particularly involved in the Agricultural Adjustment Act. He was re-elected to a full term in 1932 but decisively lost a re-election bid in 1938. Whereas Lloyd Bentsen was born and raised in the Lone Star State and he served as a United States Senator for Texas from 1971 to 1993 and was the Democratic Party nominee for vice president in 1988 on the Michael Dukakis ticket.

You might wonder what ties both these men together? Well, it is the fact that in both cases they were the last Democratic Party representatives to serve as senators for their home states – until last week, that is – as these, along with several other diehard ‘Red’ states turned ‘Blue’. As the dust settles on the US midterm elections, the scale of the victory for the ‘Dumocrats’, as President Trump calls them (“most people don’t know there is a ‘b’ in the word dumb”) has turned from a blue wave to a tsunami - for the record Don, there is a silent letter in that word too!! 

In the end, lousy consumer confidence once again manifested itself at the polls rather than the cash register. If there is one thing that people across the political spectrum can agree upon, it’s that they really don’t like inflation, and the midterm results are a significant reflection of that. 

On the positive side, the year after midterms has historically delivered stronger-than-usual returns for US equities. Moreover, it’s easy to see how markets might embrace gridlock even more warmly than usual if Congress manages to restrain some of Donald Trump’s more imperial tendencies. That being said, the 2018 precedent is not a totally rosy one. The SPX rallied nicely the day after the midterms that year (in which the Democrats recaptured the House but not the Senate) and then didn’t close above that level until mid-March. 

Other rhymes to that time include the fact that a Trump-appointed Federal Reserve (Fed) chief oversaw a rate hike in September but skipped the following meeting, and the president was in the midst of a trade war (rather than flirting with a shooting war) and constantly hinted at alternating negotiations and escalations.

Deficits loomed large on the minds of investors then too, and with funding costs even higher today than back in 2018, one could argue they are even more important now. The best cure for the federal government’s interest-rate bill is not to play games with financing; it is to lower the deficit. Perhaps we’ll make some progress on that front thanks to gridlock in Washington, though it seems fair to expect plenty of clashes between Capitol Hill and 1600 Pennsylvania Avenue.

One area that is definitely different is the future prospects for data centres, and by the reaction of share prices since the election that view is getting priced in quickly. But the driving force here is less to do with the machinations in Washington and much more at the individual state level with the governors. 

Data centre developers seeking to build dozens of sprawling artificial intelligence campuses across Texas were already dealing with a suspension of approvals under Republican Texas Governor Greg Abbott, but the new person could be even worse for them. Gina Hinojosa repeatedly called for an immediate moratorium on data centre development and has vowed to halt approvals until “a legislative session that puts Texans first so that we don’t have any more communities in Texas who are powerless against these global corporations”. Texas accounts for nearly 30% of the US data centre capacity set to come online in 2028, representing by far the largest share of any state.

Combining Hinojosa’s victory with those of other Democrats who won governor races from Georgia to Ohio and Pennsylvania could leave half of proposed AI data centre additions across the US vulnerable to stricter local scrutiny and pushback. The threat now is that policymakers turn up the heat on those increasingly unpopular projects, slowing the infrastructure buildout and hampering the pace of AI rollouts that major companies are counting on to boost their bottom lines.

Ironically, in time this may be seen as a positive for the large hyperscalers – if the industry as a whole is being held back from spending money, the debt fuelled ‘arms race’ that has seen cashflow diminish, debt increase and the desire to be the biggest with ever increasing capex, may allow them to return to share buybacks and a focus on the return on the investments that they are making.

But time will tell…