What We Learned From the 2020 Congressional Elections

Key Takeaways:

• There was no landslide victory for either party in Congress. Though Democrats hold razor-thin majorities in both the Senate and the House, Fisher Investments believes gridlock is the most likely outcome.
• 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 intraparty gridlock is a likely outcome of 2020’s Congressional races.

In election years, many people focus on the presidential election to assess potential implications for stocks and economic activity. However, considering 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 more clarity to pursue new projects.

The 2020 elections didn’t result in a huge Congressional majority in the House or Senate, and such narrow margins should lead to political gridlock, a potential tailwind for stocks.

Despite Democratic Majorities, Intraparty Gridlock Likely Prevails

There was no landslide victory for Democrats or Republicans in either chamber of Congress. Democrats retained their House majority—albeit with a smaller margin than before the election—and won the slimmest edge possible in the Senate, deadlocked at 50-50 with Vice President Kamala Harris casting the tie-breaking vote. While some believe this result will create active government, Fisher Investments doesn’t believe this is likely.

Narrow 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. These razor-thin majorities mean just one or two intraparty dissenters can stop a bill from becoming law, likely killing or watering down potential legislation.

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. 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 likely to derail the current bull market and economic cycle.