What The 2018 Campaign Has Taught Us About America’s Democracy And The Economy

As the dust begins to settle from the wildest midterm election in recent history, we can start to put the outcome into perspective and make some educated predictions about its possible impact on the economy and financial markets.

Here are my top 5 takeaways from the 2018 mid-terms:

Yes, America is exceptional. There’s been a lot of hand-wringing about the political polarization of the American people and the bad things that have resulted from that divide. But we remain a great democracy; a nation where our differences are still ultimately resolved with ballots. As a result of the passion on both ends of the political spectrum, Americans turned out to vote in record numbers, determined to make their voices heard. Roughly 113 million people voted in 2018, making this the first midterm in history to exceed 100 million participants.

Despite all the anger and frustration, Americans continue to sort things out at the polls, not with riots and coups. This 242-year commitment to democracy and social stability sets America apart from much of the world and makes possible a free market economy that has generated wealth at levels unparalleled in human history.

As usual, the bums got thrown out (sort of). Historically, the President’s party often takes a thumping in the first midterm of his presidency. There have been six federal elections (Presidential and midterm) since the 2007 financial crisis, and the party in power got booted in six of them.

Why does this happen? Because the midterm election is a chance for people to share their dissatisfaction with the President’s performance; whether it’s the chief executive’s failure to keep campaign promises or flawed handling of events during his first two years in office. That was certainly the case this year.  The GOP lost 31 seats in the House of Representatives. That was about two seats more than the average midterm loss by the sitting President’s party, and enough to cost Republicans the House.

The GOP didn’t get fully bounced from power, of course, it held onto the Senate. But the loss of the House of Representatives to the Democrats will certainly make it more difficult for President Trump to press his agenda in Congress. For example, with the Dems holding the House, additional tax cuts seem highly unlikely.

It was the economy. As usual, people voted their wallets in this election. That was both good and bad for the GOP. The overall health of the economy and jobs market helped stave-off that much-hyped Blue Wave of Democratic victories. But the economy’s unremarkable 2% growth rate and a continued lag in wage growth even as stock prices and corporate profits soared no doubt fueled some discontent with the GOP. I suspect dissatisfaction with the party in power will continue until we see sustained 3.5% economic growth.

Don’t expect a post-midterms market slump. The stock market is surprisingly oblivious to most political events, including elections. The S&P 500, for example, has not declined in the wake of a midterm since 1946. In fact, that index has averaged a 15% post-midterm gain.

Looking to the next two years, remember this: In years when there was a Democratic House, GOP-controlled Senate and Republican President, the market has averaged a 10.8% annual return.

Trump will be busy in 2019. No incumbent President wants to run against a poor or slowing economy. Look for President Trump to do everything possible to juice the economy in the run-up to the 2020 Presidential election. While tax cuts may be out of the question, the President may work with Democrats on an infrastructure bill that would create jobs and spark more economic growth.

I think it’s possible the President will make an interim trade deal with China in a bid to boost American exports to China and reduce the cost of our Chinese imports by temporarily waiving the recently imposed tariffs.

If the 2018 midterms offer an overarching lesson, it is this: Never let political developments or your political views sway investment decisions. The market shows an admirable ability to ignore the three-ring circus that is Washington, DC. We investors should learn from that example.

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