Election Watch: What the 'Blue Wave' means for fiscal policy
Chief Equity Market Strategist Phil Orlando discusses what impact the 2018 elections may have on the markets and identifies two important swing factors investors should watch for in the midterms.
Published October 22 2018
I'm Phil Orlando, the Chief Equity Strategist at Federated Investors.
What impact may the midterm elections have on the markets?
This may be one of the most important midterm elections in years, as both Democratic and Republican voters are very engaged. Voter turnout will be much higher than normal, and the fear for investors at the so-called, "Blue Wave," in which Democrats regain control of both the House of Representatives and the Senate, may have fiscal policy implications. We're now enjoying the fastest GDP growth in four years, and the strongest corporate earnings growth in seven years. Surging business and consumer confidence at multi-decade cycle highs, unemployment at a half-century low, the fastest wage growth in a decade, and retail sales at their strongest in seven years. As a result, the S&P 500 is up to a new record high recently, up 40% from the presidential election in November '16. The risk for investors is that a new Congress controlled by Democrats will attempt to reverse some of President Trump's fiscal policies, such as the tax cuts, deregulation, repatriation, and the immediate expensing of capital spending. This could result in slower economic growth and declining share prices.
What should investors be watching?
Well, Republicans currently have a 23-seat majority in the House. They have 42 Congressmen who have announced their retirement. They're not running for reelection. Now, an open seat is much easier to win than an incumbent seat, and over the course of history, the party in power loses an average of 29 seats in the first midterm election. So, there's a 70% chance that the House will flip to Democratic control next month. Investors should be watching two important swaying factors: President Trump's job approval rating and the Generic Ballot. If those numbers improve from current levels over the next month, then Republicans may lose less seats than expected and hang on to a very narrow majority in the House. In the Senate, the demographics favor the Republicans, who currently enjoy an existing 51-to-49 advantage. Republicans are defending only nine seats next month, while Democrats are defending 26 seats, 10 of which are in states that Trump won in 2016, and five of them in states that Trump won by double digits. So investors should watch the polls in those key states. There's a 70% chance that the Republicans hold on to their Senate majority, and maybe even increase their lead slightly. That's important, because if the Republicans end up splitting Congress, then that takes the risk of impeachment off the table, which requires 67 votes in the Senate.
Views are as of 10-10-2018 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Advisory Services Company 18-76269 (10/18)