While there are quite a few incumbents licking their wounds this morning, the consensus was pretty darn accurate with their predictions for the makeup of Congress. Before we start predicting what is going to happen in 2020, I want to tackle a few pertinent issues our esteemed government officials will likely focus on in the coming months. Some of these policy points are perpetual points of tension while others are not. What they have in common is that they will prove to be headwinds or tailwinds for our economy moving forward. More specifically, tactical allocators and DIY’ers need to pay attention to what is going on with this fractured government.
With all of the market drama leading up to the election, you may be wondering what the heck is going to happen now that all of our commercials suddenly become Christmas related. Well, hopefully you have at least heard that since 1949, the S&P 500 has been positive 100% of the time in the year after a midterm election.* That’s a really high percentage.
If you nerd out on cable financial news, you have also probably heard the third year of a President’s first term is historically the best year for equity markets, which is convenient. Soooooo, it’s settled then! Let’s all buy US large caps, sit around and do nothing... (Compliance would want me to make sure you know I was being sarcastic in the last sentence.)
Seriously, investing is easy! Right? Get ready for a truth bomb… MARKETS ARE FICKLE AND DO NOT ALWAYS FOLLOW HISTORICAL NORMS. That doesn’t mean we won’t see positive returns over the next year; rather, it means sector allocation and risk management matters.
Depending on where you fall on a whole host of policy issues is and should be irrelevant. All that matters is what you actually think is going to happen and how you prepare for it. Your portfolio is not going to position itself for success. Here is a quick rundown of what will likely occur on major policy issues. Like it or not, policy shapes sector performance, so pay attention.
Per compliance, I would like to make it abundantly clear that I have no political agenda, and I am simply the messenger of my own/research driven opinions. Also, these opinions are mine and not necessarily the opinions of Raymond James Financial. Cool, now feel free to agree or disagree, but definitely don’t take the following as actionable trade ideas. (not sarcasm this time, or was it?)
Taxes:
It is highly likely we will see the House try to undo some of the corporate tax reform enacted last year. There is less than a zero percent chance they get anywhere with their goals of raising corporate taxes again. It may never even garner enough support to warrant a vote in the Senate (where it will undoubtedly be laughed off the floor.) There is a better probability the House will pass a modification to the individual tax plan in order to add additional cuts for the middle class. Finding funding for this will be tricky even though Republicans are keen on passing another tax cut. The obvious solution would be to raise taxes on high income earners, but the conservative powers that be don’t really like the redistribution of wealth model. For entertainment purposes only, this will probably be in the headlines right after the House gets done putting subpoenas on President Trump’s tax returns.
Bottom line: There will not be an increase in corporate taxes unless Democrats win the Presidency and the Senate in 2020. Individual taxes will likely stay the same save for a slight chance for additional middle class tax relief.
Spending:
Frankly, this is kind of irrelevant at the moment. 2019 spending is essentially planned for already; however, raising the debt ceiling is going to make for great TV in early March of next year. Republicans have already begun talking about spending cuts on the margin. I’m not sure if it is just lip service or not, but they are targeting .3-.5% of GDP as their starting point. This has largely been driven by President Trump demanding a 5% cut on discretionary spending. Even though curtailing spending has been a major talking point amongst Democrats over the last year, they will not allow any meaningful cuts unless they are defense related, and we all know how Trump feels about defense spending. I mean, we can’t have an awesome military parade without a ton of tanks, right?
Bottom line: Not much is going to happen here. I could go on a tirade about our fiscal problems, but that is a post for another day.
Trade:
Democrats have been railing against the Trump administration on foreign policy and trade. Most notably, ex President Obama has been targeting a lot of his time and energy on our standing in the world. This is certainly up for debate; however, the House will not wield enough power or be able to justify standing in the way of potential deals between the US and the countries we are currently negotiating with.
Bottom line: If deals are going to get done with our North American Allies, Europe, and China, the House will not waste too much time and energy trying to derail them.
Healthcare:
Ironically, this is the single most important issue for voters who flipped seats in the House. I only say this is ironic because most of the health insurance problems stemmed from the last time Democrats had control of congress. Republicans certainly didn’t do much to make the case for more affordable healthcare, but they also weren’t the folks behind the problem. Voters either have short memories, or they simply want everything to be free moving forward. It’s hard to say. One potential positive would be a bill dealing with the soaring costs of prescription drugs. Democrats have made this a pillar of their stump speeches.
Bottom line: President Trump has publicly lambasted big pharma for their pricing practices, so this may be the first meaningful bipartisan legislation to pass during his administration.
Infrastructure:
Democrats have been calling for infrastructure spending for years. Oddly enough, so has President Trump. On the surface, this seems like another great opportunity to work across the aisle. Unfortunately, the nature of the leadership in the Democratic party will make this virtually impossible. Not dissimilar from the Republican tactics of 2010, the Democrats basically want to start fires for the administration. There is no shot they would hand President Trump a win on infrastructure before the 2020 election.
Bottom line: There is literally no funding available without significantly raising taxes or cutting social programs and defense spending. You can do the math on how that will work out with a divided Congress.
FINAL THOUGHT: After writing this, I am inclined to wonder what it would be like if real people with meaningful real-world experience actually ran our government. Of course, there are outliers that fit the bill; however, they are few and far between. I have an idea, let’s all pool our resources and send the Bobs to Capitol Hill for a little “consultation.”
Disclosures:
*Per S&P 500 Historic Chart Data - The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.
Individual investor's results will vary. Past performance does not guarantee future results. Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.