The Election Results Are (Almost) In. Financial Advisors React.

After two years of Democratic control of Washington, it looks like the country is in for at least two years of divided government. Midterm election voters have handed Democrats a 50-to-49 majority in the U.S. Senate, pending a runoff election next month between Georgia Sen. Raphael Warnock and challenger Herschel Walker. Even in a 50/50 Senate, Democrats would have the edge, with Vice President Kamala Harris as a tiebreaking vote. Control of the House of Representatives hasn’t yet been decided, but prognosticators expect that Republicans will have a narrow majority when all the votes are counted. So what do the election results mean for markets, tax policy, and other financial issues? We asked financial advisors in this week’s Big Q column.

Cheryl Holland

Cheryl Holland, president, Abacus Planning Group: When you have a divided House, Senate, and president, there tends to be a bit more fiscal restraint. And at a time when you don’t need fiscal stimulus, or you already have it in motion through the infrastructure bill, that’s probably not a bad thing. Both parties tend to increase spending, they just spend on different things. It’s hard to say what this incredibly large federal deficit is going to mean to the economy long term, but I think most of us would say it’s probably a good idea for that not to continue apace. We’ll probably get retirement legislation at year end, but it’s not going to be anything around spending. It might be on delaying required minimum distributions or allowing more flexibility on business retirement plans, but it’s not going to be anything very impactful.

We actually think the markets impact election outcomes more than the other way around. Thursday’s rally [when the S&P 500 rose more than 5% amid evidence of slowing inflation] showed investors care much more about inflation than midterm elections, as they should. People want to have confidence in the steadiness of the Fed fighting inflation, and it’s not like this election will mean [Federal Reserve Chairman] Jerome Powell is going to get kicked out.

Jamie Hopkins Courtesy of Carson Group

Jamie Hopkins, managing partner of wealth solutions, Carson Group: You can expect we won’t see much legislation around student loan forgiveness, tax reform, or healthcare reform. However, it does feel like the Secure 2.0 bill that passed the house this summer could still get done in the Senate in December after a little bit of cleanup work. As for the markets, the good news is that historically, the fourth quarter after the midterm election has been very positive for the S&P 500. Since 1950, it’s averaged a 20.1% positive return in the third year of a first-term president. Now, the past doesn’t guarantee the future, but it often rhymes. Lastly, a split Congress means tax reform is likely pushed off two more years, condensing the time to get a new bill done. Remember, we are quickly racing toward the end of 2025, which is a tax cliff of sorts under the Tax Cuts and JOBS Act as a lot of the individual tax cuts expire.

Peter Mallouk, Creative Planning Courtesy of Creative Planning

Peter Mallouk, president and CEO, Creative Planning: The election result means pretty much nothing for your portfolio. We’re not going to see things that directly impact people change, we’re not going to see things that directly impact markets change. It’s going to continue to be all about the Fed, followed by housing and inflation and China and Ukraine and energy and all the same topics that we had before the election.

What would really mean something to people is, are they going to get some kind of tax break as the result of the election? Will some kind of spending be targeted towards them? The answer to almost all of those things is that nothing’s going to happen. In general, whether the Republicans are in charge of everything, the Democrats are in charge of everything, or it’s a divided government, the market historically just goes up and right through all of that, with remarkably little variance. But the market does like certainty, it likes to know what it’s dealing with. When government’s divided, we know that probably nothing’s going to change. So the market has a little bit more certainty, which takes that one variable out of the performance equation. But we still have uncertainty around what our energy is going to cost this winter, what’s going to happen with Ukraine, when the Fed is going to be done raising rates and how that will impact unemployment. We have all that uncertainty, which is still driving things, but we don’t have to worry about whether the tax rate is going to change 5%.

Patrick Fruzzetti Photography by David Beyda Studio/NYC

Patrick Fruzzetti, managing director, Rose Advisors (Hightower): I’m telling clients that markets tend to like gridlock, they tend to like divided government. If fewer things are getting done within the government, well that’s kind of sad as a citizen, but as an investor you have a little more predictability. Markets tend to rally postelection because they don’t like uncertainty. And although there’s still some uncertainty out there, we do know more about the results of the election now. That said, it’s tough to differentiate what drove the market’s massive rally last week, because you also had the CPI number come out, and that and the election sort of combined. But I’d say right now the Fed is leading the way in all things market-related.

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I actually think we’re still in a recession. At some point during 2023, we’ll perhaps see a market signal that we’re coming out of it. But I’ve positioned the portfolio to still be somewhat defensive. I think that things like the healthcare sector, defense, the aerospace sector, even parts of the consumer sector can benefit from a divided government. Energy had already been booming and I think will get a little bit of a tailwind with a divided government. In the end, the reality is that politics just doesn’t matter a ton unless it’s a one-party sweep.

Chuck Bean Judith Sargent Photography

Chuck Bean, CEO, Heritage Financial Services: We advise our clients not to look too closely at election results, because it’s times like these when a lot of behavioral and emotional mistakes can happen, where people make knee-jerk reactions based on a party winning or losing. And the economy and markets are obviously a heck of a lot more durable than any one election result. Obviously, the main market drivers right now are inflation and the policy of the Fed.

With that said, if you look back to 1950, the S&P 500 historically corrects about 17%, on average in a midterm election year, the largest decline of the four-year presidential cycle. And then in the final quarter of the year, we’re off to the races again. The market hates uncertainty. And the good news is that when that uncertainty dissipates, stocks return on average 32% over the ensuing 12 months. And divided governments have historically been good for markets. When you have divided government, legislation is more difficult to pass, and markets generally prefer that.

Dan Ludwin

Dan Ludwin, president, Salomon & Ludwin: I think the greatest outcome of the election is that it didn’t seem very contested. The biggest fear we had is that the gloves were going to come off again, people we’re going to be fighting about the results and challenging the results. At least based on the last time that happened, it was a very unsettling experience. The other good news is that it seems like not a whole lot is going to change. From a tax standpoint, I don’t think we’re going to see much change because of the split control. In fact, for one of the first times in a long time, the Fed is more powerful than an election cycle: The election pales in comparison to the interest-rate moves.

Write to advisor.editors@barrons.com

Source: https://www.barrons.com/advisor/articles/midterm-election-stock-market-financial-advisors-51668537743

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