ON THE MONEY: How will divided government impact economy?

November 11, 2018

Now that the Democrats have taken over control of the House of Representatives, what will be the impact on the economy and what should investors look forward to in the next 24 months?

First things first: According to David French: “As much as the Democrats rightly celebrate their House win, the Senate results are quite possibly more significant. They result an enduring challenge for progressives, a roadblock in front of all their political and judicial dreams.

“Both parties got the things they felt they had to have. The Democrats obtained the subpoena power in the House, the ability to investigate Trump and the ability to block what remains of his legislative agenda. The Republicans gained the ability to steamroll the Democrats on judges and built a Senate cushion for 2020. Trump gained the ability to campaign against Nancy Pelosi even as his administration (and business relationships) will be placed under a microscope.”

One thing is certain: there’s going to be a big focus on investigations, not just of President Trump from the House Democrats, but also of his Cabinet and the type of routine oversight that one would expect in any situation where there is a divided government.

Investors should not overreact to all of the information that will emanate from the House of Representatives in the days ahead. When the Special Counsel Robert Mueller was appointed, the stock market dropped in response to that news. However, the markets quickly rebounded and the reason is that there’s just not that much day-to-day connection between investigations and the business of governing the country.

The agencies that enact the policies that directly affect investors, like the Securities and Exchange Commission, are really quite independent and somewhat insulated from the warp and woof of the activities of the Congress. Suffice it to say that investors should stick to their game plan and not fret over the daily information on investigations including tweets from the various involved parties.

In a divided government, legislation can only be enacted by bipartisan support, and it is fair to say that there has been virtually none of that activity thus far in President Trump’s administration.

Richard Neal will assuming the reins of the House Ways and Means Committee, which is the tax writing committee of the House. One of the topics that he is most interested in is fine tuning the retirement system, perhaps by providing greater access to tax-favored accounts for employees. Neal may propose that a greater number of employers be required to provide an Auto 401(k) plan for their employees.

Another important change in Committee assignments will be the replacement for Orrin Hatch as chair of the Senate Finance Committee, since that committee is the Senate counterpart to the House Ways and Means Committee.

One piece of legislation that will probably be proposed in the House will address making certain improvements to our national infrastructure. The price tag would be enormous and would face an uphill battle in the Senate, but anything is possible.

Remember though, “Gridlock is good” is an oft-heard mantra when it comes to stocks. It comes from the idea that neither the President nor the Congress will be able to accomplish much in the next two years. Thankfully, politicians won’t be able to do much harm or to undo the market-lifting measures already that are already in place.

Since 1928, stocks have produced an annual average return of 12 percent in years when a Republican president held office and control of Congress was split between Democrats and Republicans.

Update hourly