A Democratic Sweep In November Could Stall The Stock Market

Steve Pomeranz: Well, midterms are right around the corner, and if you’re hoping for a blue wave in November, you’re going to want to know what you’re rooting for. Rick Newman, Senior Columnist of Yahoo Finance, is back with me to discuss actually what a Democratic sweep could look like for your investments.

Hey, Rick, welcome back.

Rick Newman: Hey, Steve, happy to be back.

Steve Pomeranz: Some put the odds as greater than 50/50 that Democrats will win control of the House of Representatives. The odds are not so high that they’re going to take the Senate. First of all, where did the source of these odds come from?

Rick Newman: There are a variety of sort of political forecasting operations. Larry Sabato is a professor at the University of Virginia; he’s writing something called “The Crystal Ball:” there’s the “Cook Political Report.” These guys are deep in the weeds on what’s happening in all the different House races. And they basically handicapped every House race based on what polls and other data they have.

And that’s where we’re getting to this idea that odds of the Democrats taking the House might be, I’d say around 65% at this point.

Steve Pomeranz: Well, I know there’s a website called predictit.org, have you seen that?

Rick Newman: Yep.

Steve Pomeranz: So that’s where you can actually bet on these things, and you’ll have this kind of crowd-sourcing type of betting that some say is more accurate than, I guess, whatever discounting economists may do or so on.

Rick Newman: Yeah, and PredictIt and there are some other sites like that. They’re not doing any original research into what’s likely to happen in the election, they’re just taking bets.

Steve Pomeranz: Yeah.

Rick Newman: So PredictIt basically reflects what the market, if you will, which is basically everybody who is weighing in on it, with an opinion on this, what the market thinks is likely to happen.

Steve Pomeranz: Yeah, so it’s like Vegas odds kind of thing.

Rick Newman: Sort of, and last time I looked, you know that’s kind of predicted, kind of close to what these other research operations were saying.

Steve Pomeranz: I bet secretly those other research operations are just going to the website and getting all their information.

Rick Newman: It could be.

Steve Pomeranz: Getting their odds and then kind of figuring out a story behind it, only kidding. All right, so you wrote recently that if the Dems do win, it could be bad for investors if Republicans lose control of the Congress but not the Senate. Why would, I mean, wouldn’t that be gridlock, why is that so bad for investments?

Rick Newman: Yeah, well, so let me go through three possible scenarios here in the midterms. The first scenario is nothing changes and Republicans retain control of both houses of Congress. The second scenario is that Democrats take one house of Congress, but not both. And if that happens, it’s almost certainly going to be the House of Representatives and not the Senate.

And then the third scenario is that Democrats, there is a blue wave, and the Democrats take control of both houses of Congress. So I think to the extent markets are pricing any of this year and I think markets expect what the polls are basically saying that the likeliest outcome is that Democrats take the House but not the Senate.

So, we have split Congress and that is the likeliest scenario. Which means that Trump, stuff that Trump has already gotten done that would mainly be the tax cuts, will stay in effect. There’s no way Democrats would be able to undo that. But that Democrats would be able to block further Trump legislation or Republican legislation.

So basically, we would just have what we have right now for the next two years. The more interesting scenario is if Democrats take both houses, which would be a big surprise because it’s very difficult for them to take control of the Senate just because of the way the elections are set up this year.

And I think if Democrats did take control of the Senate, markets would interpret that as a surprising shift to the left among voters. So that would be voters saying, you know what? It’s not just that we want Republicans out, we’re actually moving considerably further to the left than anybody anticipated.

And a Democrat-controlled Congress would still not be able to override a Trump veto. So not much would really change before 2020. But that would tell us that the odds of a Democrat getting elected in the 2020 presidential election are probably greater than people think right now. And if we were to have a Democratic president take office in 2021 that could threaten elements of the Trump agenda especially the tax cuts and some of his deregulatory efforts.

So that’s what would really interest markets. And think we would see a market reaction in that instance.

Steve Pomeranz: Right, so both parties seemed to have moved away from the center. Seems like the Republican party has definitely gone right. The voices that come out of the Democratic party seemed to be moving way to the left.

I don’t hear the middle being represented. I’m not saying it’s not, I just don’t seem to hear it. So even if, if let’s say the Democrats took control of the House. And let’s say they took control of the House commandingly, but they didn’t take control of the Senate, so that’s gridlock. If they were, if the Dems were able to get some bills passed—I mean Trump has veto power. But do you think and maybe at what point do you think that the investors will start looking ahead to the 2020 election?

Rick Newman: Investors, well, put it this way, the candidates will be looking ahead to the 2020 election the day that the 2018 election is over.

Steve Pomeranz: Yeah.

Rick Newman: But you know markets have a lot to digest between election day 2018 and election day 2020. So I think they’ll be trying to figure out what kind of policy changes are we likely to affect. And remember, Trump is implementing a lot of protectionist trade policies with no input from Congress at all because he can.

He doesn’t need Congressional input to do that for the most part. So I think markets are going to be full of, investors will have their hands full just figuring out what comes next. And markets just don’t care very much about what might happen two years from now. I mean, just not that much forward thinking in the markets, but one other thing I would like to toss in here is implications for the Robert Mueller investigation.

This is just me speculating, but if you’re Trump, you might be thinking, well, if Republicans win both houses of Congress, and I really do want to fire Robert Mueller, then that might be the scenario under which he does it. If Democrats have control of one house and therefore have control of the committees and new found subpoena power and investigatory power,

I think it makes it much harder for Trump to fire Robert Mueller because the blowback would be that much more severe in whatever house Congress demonstrated. I’m not sure how much the Mueller investigation really does impact markets, but if it rises to the level of the possibility of impeachment., I think markets do care about that.

Steve Pomeranz: Yeah, we’re talking about the midterm elections and what they might mean for investors, depending on what party takes over which house. I’m speaking with Rick Newman, Senior Columnist of Yahoo Finance. Let’s review a little bit and discuss what the Republicans have already done to juice this economy.

Of course, we all know about the tax cuts. What else?

Rick Newman: There’s been an increase in government spending last year, a lot of that was on defense, but there was an increase in spending on other things as well, not something we typically associate with Republicans, but that is something they supported.

And that is affecting GDP growth. I mean that’s one of the reasons we’re seeing these strong GDP growth numbers for at least a couple of quarters. And that’s kind of about it in terms of markets. We know there are other things Republicans have talked about doing including another tax cut, even lower taxes.

Steve Pomeranz: Yeah.

Rick Newman: It doesn’t seem like they are likely to get that done this year. But this is another issue that’s on the table if Republicans retain control of both houses of Congress. I think we will see additional tax cuts in 2019, which Trump would sign.

Steve Pomeranz: I think there’s been a slashing of regulations as well.

Rick Newman: Well, that’s something that has happened more at an administrative level that Trump has been able to do himself. I mean, Trump has certainly talked about that, and we have seen a few high-profile instances where, for example, he’s making it easier for coal plants to operate, a lot of action on environmental regulations.

It’s very hard to quantify whether that is actually helping businesses in a tangible way right now. It’s just the pass-through, some businesses say, yes, this is helping us. But it’s hard to identify the pass-through and whether this is actually helping to create jobs or anything like that. But yeah, anecdotally, I think you can say, yes, he has cut regulations.

Steve Pomeranz: Well, I think it’s important that you make that distinction that you’re not really seeing kind of the proof of this. But there is this general talk out there that not only do they reduce taxes but they’re also cutting regulations. But you’re saying that it’s not necessarily true or it’s in a way.

He’s done it in some areas which have been gotten some press. But as far as systemically changing that and you don’t really see it. Let’s talk about the Democratic platform. If they had control and moving into 2020 with the possibility of a Democratic president, what would their platform look like?

Rick Newman: Democrats have been very clear that they would like to roll back some of the Trump tax cuts. This, if it were to happen, which it won’t as long as there’s a Republican in the White House, but let’s go, this were to happen in let’s say 2021. I mean this would directly affect markets, so Trump cut the corporate rate from 35% to 21%.

There’s Democratic legislation to push that back up to 25%. So, it’s still considerably lower than it used to be.

Steve Pomeranz: Yeah what was it before?

Rick Newman: It was 35% before, so it would go up a little bit and then they would undo the tax cuts in the higher tax brackets.

And they want to use that money maybe for infrastructure spending which, by the way, is something Trump favors just not by rescinding his tax cuts or some other benefit programs. Democrats are also making healthcare one of their top issues this year. You see more people signing onto the old Bernie Sander’s idea of Medicare for all.

That is an enormously complicated plan that would massively disrupt the US health care system. And even if Democrats had full control of the government, I think they would be extremely hard to do. But it gets traction with voters because healthcare is a big problem in this country.

Steve Pomeranz: Yeah.

Rick Newman: Too many people are paying way too much for their healthcare, or they can’t even afford to pay for it at all. So Democrats are finding they’re getting some traction on this.

Steve Pomeranz: Well, any increase in corporate taxes I think would affect the stock market because the market has risen on the fact, at least, one important fact, that companies now have more cash in hand.

They’ve been able to raise dividends. They’ve been able to buy back their own stock. This is very positive for the stock market. And, you know, to the degree that they’re spending it on an infrastructure or buying other companies and so on, I think that takes time to play out.

But the bottom line really is that I think the market would also react to this idea that things are going to get a little tighter. A little liquidity is going to be reduced with maybe even the fact of higher interest rates. We haven’t really talked about that but we are out of time.

My guest, Rick Newman, Senior Columnist for Yahoo Finance. Rick, thank you so much for joining us.

Rick Newman: Thanks, Steve, good discussion.

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