Context for the Noisy Congress to Come

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess developments for their economic and market effects only.

The air is chilled, the pumpkin displays and skeleton dioramas are in everyone’s front yard, and we are now in stocks’ historical sweet spot! Yes, October is here, the dawn of the “Midterm Miracle,” historically a span of hot returns from midterm year Q4 through the next Q1 and Q2. Fisher Investments founder and Executive Chairman Ken Fisher detailed this in his latest New York Post column, so we won’t belabor you with those data here again. But we have some fresh thoughts on the political gridlock that powers it. Read on!

Quick refresher: Midterms trend bullish because they increase gridlock as the president’s party almost always loses seats. It doesn’t matter who the president is or which party. As Ken wrote: “Presidents know they’ll lose some of their power after the midterms, so they push their biggest, most “important” bills early on. Always. Stocks often waver then. Big legislation creates winners and losers, spiking political uncertainty and risk aversion.” But then midterms arrive! “Blinded by ideology, we all always expect bloody disaster and all hell to break loose if our side loses. That includes investors, both domestic and foreign. But subsequent legislative quiet brings positive surprise for stocks. … Ignore all of the outrage and kvetching from every side. See it like stocks do: Gridlock is good.”^[i]

We think that last bit is why the Miracle works even though hot post-midterm returns are widely known. Investors see the history, then think this time will be different. Extreme rhetoric heightens fear. That knocks expectations, building the wall of worry. Gridlock is the relief powering the climb up the wall.

The fearful phase is now. There is a ton of speculation about a “blue wave.” People know this would raise gridlock on paper since a Republican president can veto a Democratic Congress. But they see other avenues for politicians to mess with stocks. Friday, a Cook Political Report analysis projected Democrats could gain 19 House seats, “enough to secure the party a strong majority and oversight of President Donald Trump.”^[ii] For “oversight,” swap in “investigation.” Politico went further, noting a Democratic Senate win would give them committee chairs. Potentially, that tees up regulatory investigations in banking, AI, you name it. Given the Republican Party’s nascent anti-business wing, pundits warn there could be a bipartisan regulatory push.[iii]

That all sounds overstated to us. For one, a blue wave might not even come. There are only a couple dozen House seats in play, thanks to gerrymandering. Any Democratic edge probably won’t be huge. In the Senate, there are just seven true tossup seats. Republicans are mostly on defense there, and polls broke toward Democrats last month. That trend hasn’t reversed. If that holds, the Democrats probably take the Senate. But even if they sweep all 7, it gives them just 54 seats. Nowhere near veto-proof. Small Democratic majorities with a Republican White House means next to nothing passes. And if Republicans keep small majorities somehow? Party infighting as candidates jockey for 2028 raises intraparty gridlock.

But even if we get more of a blue wave, it still doesn’t mean a big regulation wave looms. Sure, crusading Senators can launch investigations. But that just means hearings. You know the type. CEOs come to Washington, flanked by lawyers. They read vanilla testimony, then give nonanswers while grandstanding politicians from both parties shout nonsense questions in hopes of going viral on social media. Maybe they lead to regulatory proposals, eventually. But regulation needs Congressional majorities and White House ok to become law. Partisan divisions and party infighting block that.

Regulatory fear often spikes before midterms. Then fizzles. In 2019, fear perked when incoming House Financial Services Chairwoman Maxine Waters put stock buybacks on her investigation list. Headlines claimed Wall Street trembled.^[iv] Nothing panned out. Stock buybacks are alive and well. If you are keeping score, the S&P 500 surged 31.5% in 2019.^[v]

Investigations in general don’t sway markets much and they don’t assure any action. Many amount to political theater. We have seen this repeatedly during the second Trump administration. They are a way for Congress to look busy while doing next to nothing. Voters hate it. Stocks love it.

So don’t sweat Midterm speculation and fear. Just smile as the bull market’s wall of worry gets taller, and welcome gridlock when it arrives.