The People Have Spoken: What Now?

By Victor Zhang - November 7, 2018

The midterm election leaves the U.S. with split control of Congress. Democrats re-took the House of Representatives, which Republicans have controlled since 2011. Republicans retained the Senate majority they've held since 2015.

Polling and political pundits pointed to this outcome, so we believe it is baked into the market. Given the tenor of the campaign and the polarization of the electorate, gridlock is now the most likely scenario on Capitol Hill until the 2020 election. Ironically, investors may find comfort with gridlock because it reduces the chances Congress will do something to upset the market.

What Stays the Same

  • Trade. President Trump has a lot of latitude through executive action on the trade front, so we do not expect the divided Congress to have a significant impact on his approach to China. The new United States-Mexico-Canada Trade Agreement will get tougher scrutiny, but Congress is likely to approve it.
  • Tax Policy. We believe anxieties about the nation's growing budget deficit may prevent policymakers from cutting taxes further.
  • Defense. Higher defense spending is possible, as the president may be able to use it as a bargaining chip for higher domestic spending favored by Democrats.
  • Deregulation. Trump retains considerable power to drive his business-friendly deregulation agenda, particularly related to energy and financials.
  • Deficit Concerns. The country's growing deficit is becoming a concern for investors. The breakdown of fiscal discipline is already contributing to higher bond yields, and if the unchecked spending gets worse, we expect it will push up inflation and trigger credit worries.

What Could Change

  • Iran Sanctions. President Trump will be walking the fine line of being tough on Iran while avoiding measures that cause oil prices to spike.
  • Infrastructure Spending. Trump and the Democrats support infrastructure spending. Given concerns about the deficit, though, a major package isn't likely, but there are better chances of higher spending on this front.
  • Drug Price Controls. Drug companies have been political punching bags for both the president and Democrats. They could find common ground here but would need Republican cooperation.

U.S. Stocks Are the True Independents

Certainly, headlines and election results can sometimes spur near-term market reactions. However, history shows us midterm election results do not affect broad market performance over longer periods. As illustrated below, the S&P 500® Index has delivered positive returns during the 12 months following every midterm election since 1950, regardless who won control of Congress or occupied the White House.

Don't Let Election Results Drive Investment Decisions

The market is made up of individual companies that will deal with economic and regulatory conditions with varying degrees of success. Even within politically advantaged and disadvantaged industries, some companies will fare better than others. Therefore, we don't make big bets on broad swaths of the market or make decisions on holdings based solely on the latest vote. Neither should you.

We remain focused on individual securities. The election outcome is a consideration only to the extent that it's a part of the macro environment that affects the companies and securities in which we invest. Even at that, we believe rising interest rates, trade tension and diverging global economic growth will have a much bigger impact on corporate earnings than the midterms.

Stick to Your Plan

After the long and acrimonious campaign, we appreciate the election outcome may be top of mind for many. But, my advice for those wondering if they should change their investment strategy based solely on the election is simple: Don't do it.

Stick to your long-term plan. This is not the recipe for winning a spot on a political talk show or gaining a legion of Twitter followers. However, the key ingredient for achieving your long-term financial goals is how much you save. From there, asset allocation is crucial. How you allocate your savings across stocks, bonds and cash, and rebalance along the way will drive your investment outcome. Election results and political posturing on TV and social media can stir up emotions, but they shouldn't be part of the equation in determining your financial future.

Victor Zhang
Victor Zhang
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      Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.