The policy and your investment account

Although wading into a policy discussion is a wild ride, I think there is room for discussion at this point. As I often do, I read Brian Westbury’s Monday Morning Outlook this week. You will recall that he is the chief economist of First Trust. His thoughts on the upcoming midterm elections in November are worth digesting.

Full disclosure, I am strictly considering the potential impact to your investment account. In other words, not on a number of controversial policies on which we could take sides. First, let’s start with a little history lesson. Forbes has compiled information on average annual stock market returns by political party in power. They published numbers for the period from 1946 to 2020. Now let me remind you – these are mathematical historical facts – not opinions subject to anyone’s bias. It reads as follows: 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 smiles, what about when the parties have full control? Democrat 6.7%, Republican 8%. Now drum roll (and an end to all those boring numbers) with Congress split at 12.9%!* We’re (at least in terms of historical averages) back to what we already knew. The market loves traffic jams. One way to do this is to divide power in Congress. You’ll want to discuss the validity of using historical averages to project potential future market returns. I am not participating in this debate. However, the facts suggest the market fared better when a Democratic president struggled with a divided Congress.

So back to Brian Wesbury. He points out that we are 5 months away from the mid-term which will decide who will control the Senate and the House of Representatives for the next two years. It gives Republicans at least a 95% chance of taking a majority in the House of Representatives. Two quick reasons: 1) they are not far from being in the majority now and 2) the party that is not in control (the Republicans) generally does very well in midterm elections.

And the Senate? It gives Republicans an 85% chance of winning a majority. I won’t pester you with the long list of reasons, but it can be briefly summarized as follows. Our Democratic president languishes in the polls with an average approval rating of 40-41%. There is also the mathematics and the quality of the candidates to be taken into account. Out of 100 Senate seats, there are only 34 races to be won. This fall, it appears Republicans have struggled to nominate high-level political talent. Thus, the chances of a change in majority control are somewhat lower in the Senate than in the House.

Back to our investment accounts. If there is any truth to these projections, every bill reaching the president’s desk will require bipartisan support. If a tax hike isn’t passed this year, it likely won’t happen until at least 2025. The temporary stalemate will impact many areas of public policy, meaning there’s no will have no new rights. Ultimately, government growth is much less due to new laws passed by Congress.**

I will end with a few repetitive comments. The federal government’s stalemate on the horizon, the improvement of our supply chain issues, some success in gradually reducing inflation, the alleviation of atrocities in the Russia/Ukraine war, and continued success of adapting to the pesky problem of Covid-19. With any luck, we may have a formula for a few years of blue skies ahead. I think a captain’s citation on most commercial aircraft is in order. “Feel free to move around the cabin, but we are expecting some turbulence en route to our destination, so please keep your seatbelt securely fastened around you.” I wish you bon voyage and prosperity in the months to come.

The opinions, forecasts and views expressed herein 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 intended as legal, tax or investment advice, or a recommendation to buy, sell or hold any specific security, or an endorsement of any specific trading strategy. Always consult a lawyer 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

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