Washington has a new sheriff in town. What is likely to change now that the Democrats have taken back the House?
New Party Make Up
• House – Democratic, minimum net plus 40 seats
• Senate – Republicans, net plus 2 seats (53-47)
Democrats take back the House
Why it matters to investors
• Bullish outlook:A split Congress can work well for the financial markets. Reckless spending or further tax cuts by Republicans, which would add to deficit – projected to be $1 trillion this fiscal year -- will be stalled in the House by the Democrats. Democrats can’t pass any legislation either – it wouldn’t get through the Senate -- so current Trump policies stay in place. The historic bull market in the 1980s started with Reagan in the White House and Democrats controlling the House. (Although historically Republican presidents with a split Congress isn’t good for the markets.)
• Bullish outlook: Dems may implement “pay-go” rule to make sure new legislation is paid for with tax cuts or spending cuts. (They’ve done it before.) This could put a lid on the growth of the deficit and be seen as positive by Wall Street.
• Wild card:Infrastructure spending. Popular idea, but Dems and the GOP usually can’t agree on how to spend money. And where would the money come from?
• Bearish outlook:Good-bye continued deregulation. Maxine Waters is expected to become chair of the Financial Services Committee. She opposed the rollback of Dodd-Frank regulations last summer – already passed by Congress and signed into law – and will be looking for ways to clamp down on the financial industry, including banks. None of the efforts would be likely to pass the Senate. Growing deficit and unpredictable trade wars may also be negatives for financial markets. And then there’s the length of this bull market run, having nothing to do with politics. Even the Federal Reserve is forecasting slower growth over the next two years.
• Wild card: Democrats having control in the House means they will have committee chairs who can launch investigations and issue subpoenas. This could make Trump’s life difficult – especially in combination with findings/reports by Robert Mueller. Democrats, though, will have to avoid overplaying their hand. If all they do is go after Trump and members of his Cabinet – not to mention his family – the American public may not like it. And the financial markets might not either.
GOP Holds onto Senate
• Republicans holding control of the Senate means that approval for court appointees, including nominees for the Supreme Court, should get through. Conservative Supreme Court will rule on upcoming cases on: partisan gerrymandering, challenge to Trump executive orders, minimum wage cases, union cases, health care challenges, 2ndAmendment challenges.
• Conservative judges tend to be pro-business and anti-regulation.
• Over the past two years, 84 judges have been confirmed to federal courts, in addition to two to the Supreme Court.
• With liberal justices Ruth Bader Ginsberg and Stephen Breyer at 85 years old and 80 years old respectively, it’s possible Trump could get more appointments before his reelection (although both are probably trying to hold on until after 2020). Recent RBG fall underscores tenuous nature of working on Court at 85.
Why it matters to investors
• Bullish outlook: Pro-business policies expected to continue without threat from Senate or federal courts. Financial markets would move (in the long run) based on fundamentals, not new policies or rulings.
• Bearish outlook:Trump policies, including tax cut, have pushed deficit to $1 trillion and national debt up to $22 trillion. Higher debt may play role in driving up interest rates. That’s not good for markets.
Outlook for Trump Agenda
• Tax Cuts 2.0 – Democrats will not sign up for further tax cuts.
• Healthcare – Battles are coming. Pre-existing conditions would not be covered by GOP proposals. Democrats want cheaper prescription drugs. Wild card: Trump could work with Democrats for solutions, although it would take him working with the same people investigating him, so that would be a long shot.
• Immigration – Possibility of new immigration policy to get through House AND Senate is an uphill battle. Trump immigration policy right now isn’t about rules and regulations, but symbols and political fights. If he wants actual legislation, that will have to change.
• “America first trade policy” – Not liked by conservative economists or the financial markets.
• The Fed– Wil the economy slow? If so, how will the Fed react?
Why it matters to investors
• Bullish outlook – Stalemate in Washington could be good. A do-nothing Congress would be a check on a do-whatever-he-wants president.
• Bearish outlook– Real problems like health care do need to be solved. Without solutions, costs of health care on individuals or state governments could be drag on economy.
What financial markets will be watching
• Trump vs. Democrats– Wall Street keeps eye out for policy or regulation changes.
• Trump trade policies– Will there be trade wars with China? Canada? EU? Not good for economy. Elimination of trade tension would be a positive for financial markets.
• Trump vs. Mueller – Bill Clinton compartmentalized impeachment so that he continued to work with Republicans for various legislation. That’s not likely with Trump, but it would be better for the markets. Pending Mueller actions will create uncertainty. Wall Street doesn’t like uncertainty. Recent “resignation” of Jeff Sessions as Attorney General adds to uncertainty.
• Impeachment?Impeachment proceedings are possible, but removal from office is unlikely – which may keep Dems from pursuing impeachment in the first place. “Impeachment” means a formal statement of charges. It does NOT mean removal from office, which is done with a trial in the Senate. Without 67 votes, Trump remains president. Assuming a 53-47 GOP majority, would 20 Republicans vote to remove Trump from office? Mueller would have to have something overwhelming. Financial markets will watch, but fundamentals will still take priority.
• Parlor conversation: State election results. Dems gained more than 330 legislative seats in state houses, more than a third of the 900 seats lost during Obama’s tenure. Democrats also gained 7 more gubernatorial positions. That means when the census occurs in 2020, and states reapportion their districts, Democrats will have a heavier presence, including governors who could approve or veto the district configurations. That could change the number of Democrats in the House in the future. Republican gerrymandering helped them dominate national and state politics over past decade.
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