Markets & Economy

Tomorrow, on Tuesday, November 6, Americans will exercise their democratic freedoms as they vote on national, state, and local representatives. While most midterm elections are lower profile affairs, this year’s looming Election Day is becoming a focal point for the nation. Key issues like health care, the economy, and immigration are top of voters’ minds.

For Republicans, Election Day represents the first real test to what has been two years of dominant political power. Since President Trump’s election, the GOP has held all three branches of federal government, as well as a significant majority of state governorships and state legislatures. Democrats will be hoping to ride a so-called blue wave back into some semblance of power.

Most political forecasts are calling for Congress to be split between the Democrats and Republicans. In the House, Democrats need to capture a net of 23 seats to capture a majority, and forecasters are projecting a 30-35 seat gain. In the Senate, where Democrats only need to gain two seats, forecasters are actually expecting the GOP to maintain or even grow their lead.

Should a divided Congress come to fruition, we are likely to enter into a gridlock scenario similar to the period of 2011-2013.

The projected congressional split is a result of the specific group of senators up for reelection this year (only approximately one-third of the Senate is reelected every two years, whereas the entire House is voted on biennially). Of the senators up for election this cycle, the Democrats have a number of incumbents locked in highly competitive reelection fights in states that President Trump won in 2016, decreasing the odds that they capture a net of two seats for a Senate majority. Should a divided Congress come to fruition, which is currently the consensus forecast, we are likely to enter into a gridlock scenario similar to the period of 2011-2013.

For investors, returning to a divided government is not necessarily a worst case scenario. Markets have responded well to President Trump’s agenda, and key items (e.g., tax reform, deregulation) have already been put in place. Although few new items are likely to be passed, it is also unlikely that a split Congress would overturn the administration’s key agenda efforts to date.

The other two outcomes have very different potential impacts but are less likely to occur. Should Republicans maintain control of both chambers, it would be status quo, which has been a generally positive time for investors. On the other hand, a Democratic sweep—and the threat of change—could weigh on market sentiment.

Near-term, the biggest impact from the Democrats capturing both chambers would be on President Trump’s ability to confirm judges. Long-term, it could raise speculation and investor worry about the Democrats taking the White House in 2020 and undoing some of the more pro-business measures of the current administration.

While we expect a split political outcome, it is challenging to predict how election results impact short-term market movements. For example, on the night of President Trump’s election, market futures were limit down, meaning they were down so much trading was halted. During regular trading later that morning, stocks would rally strongly and go on to have a strong rest of 2016 and 2017.

Regardless of the election outcome, the fundamental issues facing the market and economy remain the same. The US is approaching peak growth and moving into late cycle territory, while at the same time, key global risks are rising. Investors should avoid short-term decision making from political speculation, and instead focus on underlying economic realities.