Why the midterm election was a win for investors

There was something for everyone in Tuesday's fascinating midterm election, but for investors there was one major theme: President Trump's economic agenda — tax cuts and deregulation — will stay firmly in place for the next two years.

It's highly unlikely he will get any new proposals through the House, now controlled by Democrats. It's virtually certain that he can't get more tax reduction, as he and House Republicans have proposed. There could be progress toward an infrastructure bill, but the details will be challenging.

So it looks like there will be gridlock in Washington for the next two years, but the financial markets can live with that — even if there's no significant progress in reducing

budget deficits, which are headed higher. The key legislative factor will be Trump's veto, which looks solid; if Democrats try to pass legislation to kill his tax cuts or raise the minimum wage, the firewall against those bills will be Trump's veto pen and the solidly Republican Senate.

This doesn't mean that Washington will be boring in the next two years — far from it. In just the next few weeks there will be several major developments: a likely interest rate hike in December from the Fed; a meeting between presidents Trump and Xi Jinping of China; another budget fight over a wall with Mexico; and a major exodus from the White House, as Trump staffers move on.

And only in Washington could the next election come into focus just days after the past one. We I expect several Democrats to announce they're forming exploratory committees in the next few weeks. Joe Biden is the nominal favorite Trump challenger based on early polls, but at least a dozen strong candidates will emerge.

It's way too early to make a call on 2020, but there are warning signs for the Republicans — in particular the comeback by Democrats in Rust Belt states, and the increasingly solid support they enjoy from suburban women.

In the meantime, the focus — as usual — will be on Donald Trump. Will he tone down his harsh rhetoric and dark warnings? He got his base energized this fall, but probably can't win re-election with just his base; he needs those suburban moderates who turned against him in droves.

For investors, the outlook still looks good — perhaps not as good as a year ago — but the fundamentals are solid: modest inflation, a very strong labor market, booming GDP growth and continued excellent corporate earnings. The only dark cloud could come from Fed Chairman Jay Powell, whose upcoming rate hikes are the "biggest threat" Trump's presidency, Trump said this fall.

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