By Tim Courtney, Chief Investment Officer
Markets on average have had good performance in the quarters following mid-term elections.1 Unfortunately we can’t rely on such patterns. Broad rules such as the “Santa Claus Rally” (see 2018) or “Sell in May and Go Away” (see 2020 and 2021) don’t always pan out.
This year’s midterm elections resulted in a split Congress, with Republicans taking control of the House of Representatives and the Democrats retaining control in the Senate.2 With this division of power comes the potential for gridlock.
The Benefits of Gridlock
In many cases, investors prefer gridlock because it limits potential variables that need to be taken into account in determining prices. Market uncertainty and volatility often stem from big policy and regulatory changes like the kind we saw recently in the UK, but with a split Congress it’s less likely significant legislation will pass both chambers.
If we look at the two most recent presidential administrations, each administration has had a signature legislation package. The Biden Administration’s Build Back Better Bill3 which eventually became the Inflation Reduction Act was passed in August of this year and affects energy and climate spending, health care, and tax reform. The Trump Administration’s Tax Cuts and Jobs Act of 2017 cut the corporate tax rate from 35% to 21% among other tax modifications.⁴ Both of these acts had ripple effects across markets. Both of these acts were passed before Congress became divided.
Now that we are past the midterms and new legislation becomes a smaller variable, markets can spend the next several quarters focusing on fundamental variables, such as earnings growth, interest rates, GDP, and productivity.
Not all Rules Come from Congress
With a smaller chance of meaningful legislation being passed, this brings up another issue markets do have to consider. Many, if not most, of the rules that companies and markets operate under are developed by agencies. In many ways markets are more affected by agency decisions than what Congress does. As agencies grow there is growing risk of overregulation. Conversely, there is a risk of agency “capture” in which regulations tend to favor the largest and most connected firms and industries. In some areas such as the cryptocurrency markets and the collapse of FTX, there has been little or no oversight.5
A healthy market should be rooting for agency reform to ensure that companies, especially smaller companies, are not overburdened with regulations. At the same time a healthy market should be rooting to eliminate captured regulators that favor certain companies or industries over others. If you have any questions, please reach out to your Exencial Advisor.
- Forbes (11/07/22) – 3 Ways the Midterm Elections Could Impact the Stock Market
- The Washington Post (11/17/22) — Senate, House control is split. Can a divided government make progress?
- The Guardian (10/18/21) — What’s actually in Biden’s Build Back Better bill?
- Tax Policy Center (11/18/22) — How did the Tax Cuts and Jobs Act change business taxes?
- The Washington Post (11/17/22) — Congress took millions from FTX. Now lawmakers face a crypto reckoning.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.