What do the mid-term results mean for the economy and for everyday Americans?
We are unlikely to see significant changes to economic policy, at least in the short term. As a result, while the results will certainly have ripple effects, they are unlikely to affect the core foundations of the economy. As Warren Buffett says, markets are stronger than governments. That said, the policy of deregulation pushed by the Republicans will now slow, and there could be an infrastructure bill which could boost some industries.
For individual Americans, the strong economic fundamentals will likely mean we see a good jobs environment and hopefully continued wage growth. And a positive stock market performance in the wake of these elections would benefit 401k accounts.
How will the election results play out in the markets?
Historically, markets rise after midterm elections. Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Already we have seen markets react positively as investors consider the Democrats have taken back the House of Representatives. More importantly, the data shows the best stock market returns occur when different parties controlling the two houses of Congress. Investors hate uncertainty, and divided government prevents extreme policy shifts and makes the policy outlook more predictable.
Going back 60 years, a divided Congress has the best track record, followed by a rubber-stamp Congress. The worst combination has been a unified Congress controlled by the party in opposition to the president. According to Bank of America Merrill Lynch, under a Republican president and Congress was split, the S&P 500 has seen 12 percent annual returns. When Republicans control the White House and Democrats lead both houses of Congress, the S&P 500 chalked up an average annual return of 8.6 percent. The best scenario for the stock market has been a Democratic president and a split Congress, returning 16 percent annually.
There is one caveat here: Digging even further, the data shows the post-midterms rally hinges on how the Congress is split, and specifically, if the majority party maintaining control of the House. Data compiled by Fundstrat Global Advisors showed the median stock market return since 1896 was only 1.9 percent a year after the House majority flipped from one party to the other. Meanwhile, the median return totaled 16.8 percent when the House majority stayed the same after the midterms.
Exit polls showed that healthcare was the number one issue on the minds of Americans. What can we expect on that front?
With the Democrats in control of the House of Representatives, the healthcare policy landscape will certainly change. Further efforts to dismantle the Affordable Care Act are likely to be dead on arrival and other changes including removing protections for preexisting conditions, are likely off the table. In general we can expect the healthcare industry could benefit from legislative gridlock. However, some parts of the industry, like pharmaceutical companies, could take a hit if Washington acts to bring down drug prices.
How about other major economic issues, such as trade and infrastructure? How will the midterm outcomes play out there?
On the trade front, President Trump is likely to continue to aggressively push for changes to current trade agreements, but we may see a more conciliatory tone from the White House toward the Congress. This is because unlike treaties, trade agreements – like the recently announced US-Mexico-Canada agreement which replaces NAFTA – must pass both chambers of Congress.
There could be an infrastructure bill, as members of both parties have mentioned that as a possible point of agreement. This would provide a boost to the construction industry. The financial services industry is likely to see greater regulation and scrutiny.
Finally, I would expect the new Democratic House will prioritize environmental protection and oversight, particularly on industry. Oil and gas companies, along with coal producers, have been among the biggest winners so far in the administration’s push to ease mandates for reducing greenhouse gases. Auto makers are also benefiting from an effort to curb future fuel-economy requirements in cars and trucks.
How is the business community reacting?
The industries most likely to feel the effects of last week’s results are healthcare, financial services, and infrastructure and construction. Additionally, companies that are more impacted by trade – manufacturers that rely on imported materials, those in agriculture who depend on exports – could be affected if trade tensions are reduced.
More broadly, the business community is going to benefit from the same gridlock that the markets are hoping for. However, business leaders will focus more on the fundamentals of the economy like consumer spending that underpin continued growth.
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Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
