Politics and your investment account
Though wading into a discussion of politics is a fool’s errand, I think there is room for some discussion at this point. As I often do, this week I read Brian Wesbury’s Monday Morning Outlook. You will recall that he is the Chief Economist at First Trust. His thoughts about the mid-term elections coming up in November are worthy of digesting.
Full disclosure, I am reflecting strictly on the potential impact to your investment account. That is, not on any number of controversial policies over which we could take sides. First off let’s begin with a quick history lesson. Forbes has compiled information on the annual average returns of the stock market based on the political party in power. They have published numbers for the period of 1946 to 2020. Now, let me remind you-these are mathematical historical facts-not opinions subject to anyone’s bias. It reads like the following: President-Democrat 9%/year on average, Republican 7.4%, Senate-Democrat 6.3%, Republican 11.3%, House of Representatives-Democrat 7%, Republican 10.7%. Just for grins, what about when the parties have total control? Democrat 6.7%, Republican 8%. Now drum roll (and the end to all these boring numbers) with a split Congress 12.9%!* We are (at least in terms of historical averages) right back to what we already knew. The market loves gridlock. One way to achieve that is to split up the power in Congress. You’ll want to argue about the validity of using historical averages to project future potential market returns. I’m not joining that debate. However, the facts suggest that the market has fared best when a Democratic President struggled with a split Congress.
So, back to Brian Wesbury. He points out that we are 5 months away from the mid-terms that will decide who controls the Senate and House of Representatives for the next two years. He gives Republicans at least 95% odds of taking over the majority in the House of Representatives. Two quick reasons: 1) they aren’t far away from being in the majority now and 2) the party not in control (Republicans) usually does very well in mid-term cycle elections.
What about the Senate? He gives the Republicans 85% odds of taking over the majority. I will not belabor you with the long list of reasons why, but it can be briefly summed up as follows. Our Democratic President is languishing in the polls with an average approval rating of 40-41%. There is also math and candidate quality to consider. Out of 100 Senate seats there are only 34 races up for grabs. This Fall it seems Republicans have had some trouble nominating top-flight political talent. So, the odds of a change in majority control are a little less in the Senate as compared to the House.
Getting back to our investment accounts. If there is a kernel of truth in these projections every piece of legislation reaching the President’s desk will require bipartisan support. If a tax increase isn’t passed this year, it is likely not happening until at least 2025.The temporary gridlock will impact many areas of public policy-that means no new entitlements. The bottom line is much less growth in government resulting from new laws coming through Congress.**
I’ll close with a couple of repetitive comments. Federal government gridlock on the horizon, improvements in our supply chain problems, some success with inching down inflation, an easing of atrocities in the Russia/Ukraine war, and continued success adapting to the pesky Covid-19 problem. With any luck perhaps we have a formula for a couple of years of blue sky ahead. I do think a quote from the Captain on most commercial aircraft is in order. “Feel free to move about the cabin, however we expect some turbulence enroute to our destination so please keep your seatbelt fastened tightly around you.” I wish you safe travels and prosperity in the coming months.
The opinions, forecasts, and views expressed here are those of Tommy Williams and do not necessarily represent those of Williams Financial Advisors, Private Client Services, RFG Advisory, their employees, or their clients.
This material is for educational and informational purposes only. It is not legal, tax, or investment advice, nor a recommendation to buy, sell, or hold any specific security, nor an endorsement of any specific trading strategy. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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**Brian Wesbury, Chief Economist-First Trust, Monday Morning Outlook “The Outlook for November” dated May 31,2022