November 8, 2022 marked the mid-term elections for the United States’ 118th Congress. Shifts in potential political control often lead investors to wonder how a new regime might affect the economy and their investments. It is important to recognize the complicated and tangled nature of the economy and capital markets. While the decisions of politicians do contribute to the direction of both, their decisions are not the entire story. For example, the COVID pandemic was not a political action taken by the government, but nonetheless enacted immediate and lasting changes to both our economy and markets. There are many factors outside of politics that will steer the course of the US economy and the markets over the course of the next two years. However, this analysis seeks paint a picture of how, generally, markets and the economy have historically performed under various political regimes.
Elections
Following the 2022 mid-term elections, it appears Republicans will control the House of Representatives, Democrats will control the Senate, and Democrats will remain in control of the presidency. This marks only the 3rd time this configuration has happened since 1857 (only the second time it has happened during our sample period), and the first time since it happened in two consecutive congresses during the Obama presidency.
Economy
The most common gauge for the health of the economy growth, particularly growth in Gross Domestic Product (GDP). This measures the total economic value of final goods and services produced in the United States. Long-term average annual GDP growth has been 2.97% since 1961.
Based solely on what we now know about the 118th congressional make up and historical trends, investors can expect below average GDP growth over the next two years. That said, growth is still expected to be positive.
Markets
While GDP represents a backward-looking estimate of economic growth, capital markets represent forward looking prognostications about the health of the economy, businesses, and the American consumer. Capital markets offer investors positive expected returns to attract capital, and, in all cases with numerous annual observations, realized returns have aligned with this expectation regardless of political control.
Based solely on our knowledge of the US political makeup post-election and our understanding of historic returns during periods of similar control, we’d expect equity markets to generate strong positive return, more than their long-term average, over the next two years.
Conclusion
Understanding the political landscape may help us set expectations for what to expect from the economy and investment portfolios over the next two years. The sample size we have of a Republican/Democrat/Democrat political configuration is small. Historically, this configuration has experienced below average GDP growth, while benefitting from strong market returns. This makes sense given the timing of these configurations in the past: the four years in our sample with this political mix was during the recovery from the global financial crisis.
Investors should understand that the decisions of politicians represent just one of many factors that will impact both the economy and capital markets going forward. All investors should consult with their advisor to ensure that their portfolios account for uncertainty in planning for their goals. As always, the wealth generating forces of capitalism and, in turn, the positive expected returns of markets, remain, so investors are best served maintaining a long-term, steady investment approach.
Disclosures
This material is for informational purposes and is intended to be used for educational and illustrative purposes only. It is not designed to cover every aspect of the relevant markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. This material does not constitute investment advice, nor is it a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Altafid, PBC or its affiliates, as to its accuracy, completeness or correctness. Altafid, PBC or its affiliates do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Altafid, PBC or its affiliates have no obligations to update any such information.
