What We Learned From the 2020 Congressional Elections

Fisher Investments’ commentary and research on politics is nonpartisan, favoring no party or politician, as political bias blinds and can lead to investment mistakes. The purpose of this commentary is to analyze the election’s potential impact on markets and the economy.

Key Takeaways:

  • There was no landslide victory for either party in Congress, which means gridlock is the most likely outcome regardless of who ends up with narrow control of the Senate.
  • Politics can heavily influence stocks via new legislation, causing uncertainty and creating winners and losers. Gridlock is a generally bullish feature for US stocks as it lowers the probability of new sweeping legislation.
  • Political gridlock can happen interparty and intraparty, and we think gridlock in some form or another is the most likely outcome of 2020’s Congressional races.

In election years, many people study politics and the presidential election to assess potential implications for stocks and economic activity. However, given the fact major legislative changes generally require Congressional approval, we believe investors should also consider Congressional races in their assessment.

For businesses and other institutions, new legislation (e.g. increased regulation or tax changes) creates uncertainty and may impact the profitability of future business plans, potentially driving lower corporate investment.

A gridlocked government is less likely to agree upon and approve laws with significant economic implications. Fisher Investments believes gridlock is generally a bullish feature for US stocks as it tends to lower uncertainty, providing businesses and institutions a more favorable environment to pursue new projects.

Following Election Day, we believe no party seems set to take a significant Congressional majority, which should lead to political gridlock and boost stocks.

Gridlock is increasingly likely after Election Day

Though we will not know who controls the Senate until two Georgia runoff elections on January 5, we do know there was not a landslide victory for Democrats or Republicans in either chamber of Congress. Democrats will retain their House majority—albeit with a smaller margin than before the election, and neither party is set to have a huge majority in the Senate even after the results of the Georgia runoff elections.

However the dust settles, it will almost certainly reveal continued gridlock in one form or another. Slim majorities in both chambers of Congress likely make it difficult to pass sweeping new laws, which should give stocks one less thing to worry about.

We suggest investors refrain from making reactionary investment decisions based on election results. Neither party looks set to have a big enough majority to pass sweeping new laws that could potentially derail the current bull market and economic cycle.

Further, new legislation often gets watered down from initial proposals as it makes its way through Congress. Just look at the last two pieces of major US legislation: 2010’s Affordable Care Act (ACA) and 2017’s Tax Cut and Jobs Act (TCJA). Both were substantially different from initial proposals, ditching some of the original features in order to break through gridlock.

So long as there is political gridlock (whether of the traditional interparty or more recent intraparty flavor), the chances of sweeping legislation passing should be limited, something stocks should cheer.

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Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.