As fall hits its stride, the looming midterm elections in the U.S. Congress are increasingly becoming a focal point for the nation. On Nov. 6, contests across the country will decide whether the Democratic party wrests control of the House of Representatives, the Senate or both chambers of Congress from the Republican party, which has held majorities in both since the 2014 midterms.
With predictions of a blue wave, a red wave and seemingly everything in between blaring from media outlets, it’s worth stepping back and asking the question on many an investor’s mind: Will the outcome of the elections actually matter for financial markets?
Our answer: Probably not.
Why? Pro-growth agenda already in place
We believe the results of November’s elections are likely to have a muted effect on markets primarily because the most important items on the Republican party’s legislative agenda have already been implemented. The tax bill of late 2017 (which ushered in sweeping tax cuts for businesses and individuals alike), the budget agreement passed in February and the series of regulatory reforms signed into law over the past year were all top priorities for the Trump administration and GOP leadership—and it’s mission-accomplished for all three. Markets, as expected, have received the passage of each of these pro-growth measures favorably, as they’ve boosted corporate earnings and GDP (gross domestic product) growth.
With this in mind, it stands to reason that the only outcome that could really unnerve markets would be one that puts the future of any of these measures in doubt—in other words, a stunning Democratic takeover in both houses that would allow the party to unwind any of these policies via new legislation. The bar for this is quite high, though. Democrats would need to gain a two-thirds majority in the House and the Senate in order to enjoy a veto-proof majority that would prevent President Trump from blocking efforts to roll back any of these laws. Attaining this so-called super-majority, in our view, is almost entirely out of the question. The more likely scenario, from our vantage point, is that the Democrats win the House but lose the Senate. This would be in line with how the president’s party has historically fared in midterm elections since the 1860s—the party occupying the executive branch has typically lost about 32 seats in the House.1
Furthermore, even if the implausible were to happen, we don’t think that the Democratic leadership would gut either the tax bill or the budget agreement in their entirety. Rather, in our view, a more likely outcome would be the reallocation of some of the dollars behind either of the measures—but not a full-on withdrawal of funding.
