What the US midterm elections may mean for markets

Juhi Dhawan (0:06)

If we end up with split Congress, or if we end up with a sweep on the other side for the Democrats, policy will likely see meaningful shifts, and that matters for investors as the market continues to rotate towards who will be the relative winners of the future, rather than those of the past.

Thomas Mucha (0:30)

Welcome to WellSaid. I'm Thomas Mucha, Wellington Management's geopolitical strategist and host.

So over the next month or two, we're going to hear an awful lot about the US midterm elections, and for good reason.

Polling averages show Democrats maintaining an advantage on the generic congressional ballot, while Republican control of both chambers appears, let's say, contestable. Now, what looked several months ago like a relatively favorable Senate environment for Republicans, now appears considerably more competitive. Meanwhile, voters continue to focus on issues ranging from inflation, affordability, to immigration, to energy prices, as well, of course, as the continuing effects of the ongoing Iran conflict. So plenty to discuss. Joining me today to talk through these questions, is macro strategist Juhi Dhawan, who's one of the firm's most astute observers on the US policy and political backdrops, including Capitol Hill, the White House, and of course, the Fed. She's also a long time close colleague of mine. So Juhi, welcome back to WellSaid.

Juhi Dhawan (1:38)

Thank you, Thomas. It's great to be back, especially for this particular episode, because I think it has so many implications for investors to think about.

Thomas Mucha (1:47)

Well, the midterms are coming up closely, so we're very happy to have you here. So as we sit here, Juhi, in the weeks before November 3rd, which of course is the date of the US midterms, what strikes you as the most different aspect of this current political cycle as it relates to the midterms?

Juhi Dhawan (2:08)

Something unique about this environment is that fiscal policy has been so dominant since COVID.

So every election since COVID has been super charged for investors because there have been so many policy shifts that occur. This midterm could change the makeup of Congress as you just referenced. And that means the ability for the president to maneuver may get limited or may get expanded depending on what the outcome is. So that's from an economic standpoint. Something from a historical standpoint to consider about elections in the United States, though, is that with redistricting and a number of shifts that have occurred, the number of competitive races that exist in any election continues to narrow. So in some ways, it's easier for people to know which races to focus on, but harder to call because the margin of error continues to go down.

Thomas Mucha (3:09)

Right. So there's more noise in the system, more political volatility.

One of the things that we've been talking about a lot is political uncertainty in this cycle. We've got the domestic political debate, we've got the Iran War, we've got all this news on artificial intelligence with the Treasury and the Fed generally. So how much influence, Juhi, do you think this high degree of uncertainty is having on the direction of investor sentiment? And most importantly, where could the outcome of November 3 genuinely matter for markets?

Juhi Dhawan (3:46)

The economic uncertainty environment has plagued us for several years now. So as investors, I think we've become used to living with a higher degree of uncertainty than in the past. This year, equity markets have been really fortunate in seeing a very strong earnings backdrop, which has allowed for some of the volatility that is associated with policy uncertainty to be offset.

Thomas Mucha (4:12)

And good news is washed over that, right?

Juhi Dhawan (4:14)

Still what I would say to you is until we know the election outcome, there is a certain sense of not knowing where policy may shift.

So what we are watching most closely, of course, is whether a single party, namely currently the Republican Party, has control of both houses, whether that will remain the outcome. If we end up with split Congress, or if we end up with a sweep on the other side for the Democrats, policy will likely see meaningful shifts, and that matters for investors as the market continues to rotate towards who will be the relative winners of the future, rather than those of the past.

Thomas Mucha (4:54)

Well, let's dig into that. Let's look at the sectors that might be the winners and losers in each of those scenarios that you just laid out.

Juhi Dhawan (5:02)

So, let's start with the status quo of saying, the Republican Party maintains both houses.

Thomas Mucha (5:08)

An unlikely outcome at this point, right?