11/07/2018
The midterm election has produced a divided government, as the Democratic party won back control of the House of Representatives, while Republicans retained control of the Senate. The next two years in Washington promise to be quite different from the past two.

Ahead of the election, there were several overwhelmingly consensus expectations. It was widely believed that Democrats would regain control of the House. Prediction sites indicated that this was a virtual certainty, with an almost 90 percent probability. By nearly 80 percent probability, the Republican party was expected to retain control of the Senate. This time around the polls mainly got things right.

While the outcome represents a significant shift in power in Washington, it fell short of the so-called “blue wave” election that some had hoped would also shift the balance of power in the Senate.  

It is also widely assumed, as history would indicate, that stocks will rally after the midterms, almost independently of the outcome, as a major source of uncertainty is removed and the favorable third year of the presidential cycle looms on the horizon. 

It is conventional wisdom that a Democratic House and a Republican Senate is an acceptable outcome for stocks, not as favorable, perhaps, had Republicans retained control of both houses, but more favorable than a Democratic sweep. The reasoning is that the resulting gridlock will do little harm. Under such a scenario, it is assumed that stocks can move higher, but the gains may be modest. How capital markets react remains to be seen, but the election did not produce the tail risk event of either party controlling both houses of Congress. To that extent, the outcome should already be largely reflected in prices.

The economic issues that the new Congress must confront remain unchanged by the outcome, but how they are addressed certainly will. Any additional changes to the Affordable Care Act will now become more difficult, as will extending the individual tax cuts beyond 2025. An infrastructure spending bill could happen, as there is bipartisan support, but the chances are still slim, as the longstanding hurdle of how to pay for it remains.

The new United States-Canada-Mexico trade agreement must still be ratified and that is expected to happen. The White House will also retain the lead on trade policy in general, and with China in particular. There is likely to be some bipartisan sympathy to limit drug prices as well. And the debt ceiling will need to be addressed in March, a process that will now likely become more contentious.   

Perhaps the only unanimous casualty, under almost any election scenario, is the federal budget deficit. On the campaign trail, there was little talk about the deficit, as the focus was instead on healthcare and immigration. Meanwhile, the deficit continues to grow. How much room that leaves for future fiscal initiatives remains an open question. 

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The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
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