The 2018 mid-terms are now in the books. With approximately $5.2 billion spent, they will go down as the most expensive congressional election in history. The second most expensive was 2016 with a total spend of a little over $4.4 billion on the congressional portion of that year’s election. That is up approximately 18%, well in excess of inflation, signaling that politics remain at the forefront of people’s minds. What does the outcome suggest for the economy and markets going forward? Let’s take a look.
In the upcoming economic cycle, divided government will make passing an infrastructure bill one area of potential compromise. On the other hand, it makes it all but impossible to establish certain aspects of the Tax Cuts and Jobs Act as permanent. Regulatory reform momentum, however, is likely to continue as that is largely a function of the Executive Branch of government. Ironically, a little less growth/inflationary pressure to prevent a runaway FED, combined with a check on the trade war position, may be exactly what the market is looking for at this point in the cycle.
In terms of the market’s overall potential reaction, past performance is no guarantee of future results, but history does show a buildup in volatility leading up to mid-terms, followed by smoother sailing once some of the uncertainty has been removed – see below charts that illustrate this pattern. Furthermore, while single party control of government may be enticing, divided government like we now have is the market backdrop the majority of the time.
The bottom line is that these are unique times (interest rates, tariffs, overall political climate, etc.), but longer-term, the market itself is a “weighing machine” of earnings, dividends, buybacks, innovation etc., that rolls on, typically, no matter the tensions of election time. As always, we are happy to discuss these topics further. Please reach out to your Ancora advisor or relationship team with any questions.