Moving On (11/7/2018)
Midterm elections are in the books for the most part. After much anticipation, Americans have chosen to shift the balance of power in Washington D.C., giving Democrats control of the House of Representatives. Republicans maintain their control of the Senate, meaning that we can expect legislative gridlock through the remainder of President Trump’s term in office.
Changes in Washington have not historically impacted long-term performance. The elections are mostly a distraction for the markets, and while you may see uncertainty having a negative effect, finally having an outcome could provide some stability. The uncertainty often delays new capital from coming into the markets until an outcome is decided. Now the unknown is known.
Markets seem to prefer a divided government. The system of checks and balances is the system our country was built upon. When you have houses controlled by different political parties, they must compromise a bit if they’re going to get anything done, and this tends to sometimes be positive. Even with the limited change in policy and legislation, the change in Congress should not have a significant impact on the expected path of monetary policy, markets, and the macroeconomic environment. Under a divided government with lower expectations for progress on legislation, we could see defensive sectors like staples, telecom and utilities benefit.
The market has weathered many different political environments before. The past has generally demonstrated the value of developing a long-term plan and sticking to it, regardless of who is controlling Washington. Fundamentals remain the key ingredients when making asset allocation decisions. Continued diversification with equities and fixed income could help to buffer overall portfolios from downside market fluctuations, trade disputes with China as well as rising interest rates.
The bottom line is that elections are mostly a distraction for the markets. The short-term impact should not distract focus from the fundamentals of economic growth, earnings, and inflation.
November 7, 2018