With Republicans winning a majority of seats in the House of Representatives and Democrats holding the edge in the Senate with at least 50 seats and Vice President Kamala Harris as a tiebreaking vote, we will now have two years of divided government.
We have the following thoughts on this change after Democrats controlled both chambers of Congress and the White House for the last two years.
- A divided Congress implies gridlock that probably produces the least number of potential compromises and new legislation. Any legislation would have to have broad support by Republicans (to be put on the House floor), 60 votes in the Senate, and Biden’s signature. However, the $1.2 trillion Infrastructure Investment and Jobs Act in 2021 and the $280 billion CHIPS and Science Act of 2022 were both passed on a bipartisan basis in the last Congress. Both were deemed critical to the nation’s future and any legislation that does pass would have to be in the same category.
- With Republicans in control of the House, future passage of elements of President Biden’s Build Back Better agenda, which included social program spending and tax hikes, seems very unlikely.
- Given ongoing geopolitical tensions with China, Russia, and Iran, defense spending is the obvious area for future compromises around potential increases in government outlays.
- Other areas of potential compromise include strengthening the supply chain and ending dependence on China, with U.S. manufacturing and cybersecurity potential beneficiaries.
- A modest bill making it easier to get a permit for energy infrastructure is incrementally more likely with Republicans in control of the House. This would be beneficial not only for traditional oil and gas companies but also clean energy producers that will ultimately require significant permits.
- Democrats were unable to revoke the Trump tax cuts while they had full control of government, though they did impose a corporate minimum tax. Given that they must now share power with Republicans that are strongly averse to raising taxes, future tax hikes face a high hurdle. This should ultimately benefit corporate profitability and earnings growth.
- Historical data shows that, on average, the stock market tends to underperform the average annual return during midterm election years, although usually rallying into year end. History also shows overperformance in the subsequent year as uncertainty over policy is lifted, at least temporarily, because the president and the makeup of the new Congress are known. However, history also shows macroeconomic, financial, and geopolitical conditions have a strong influence on any year’s market returns.
- Given the current macroeconomic uncertainty, we remain cautious toward stocks and other risk assets. However, we emphasize the importance of sticking with long-term investment plans where stocks continue to play a critical role for maintaining future purchasing power.
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