Personal Wealth Management / Politics

Fisher Investments' Founder on the 2022 US Midterm Elections

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher shares his thoughts on the upcoming 2022 US midterm elections and potential market implications. As always, Ken and Fisher Investments caution investors to avoid being swayed by political ideology when analyzing financial markets.

According to Ken, there are a few possible outcomes for each party in the upcoming midterms. But in any of the scenarios he mentions Ken says it’s very likely the result will be strong political gridlock—a favorable scenario for stocks.

“Hardcore gridlock,” as Ken puts it, makes controversial legislation nearly impossible to pass. This gridlock reduces uncertainty, which calms capital markets. Businesses can plan over the longer term without fear of potential disruptive legislative changes. Fueled by reduced uncertainty, Ken says the fourth quarters of midterm years are overwhelmingly positive for stocks, and this positive effect ripples into the third year of a president’s term.

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Title screen appears, “Fisher Investments' Founder on the 2022 US Midterm Elections.”

Text below title reads "Recorded July 14th, 2022"

A man appears on the screen wearing a navy suit, sitting in front of a fireplace.

He begins to speak.

A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.

Ken Fisher does hand gestures from time to time while talking.

Ken Fisher: Right about this time of year, every other year I offer a video on my views about what will happen in the election ahead this year, of course, midterm elections in America.

Ken Fisher: This commentary today is solely devoted to the politics of America. I want to be very clear that I'm not trying to convey ideology here. All of my analysis wants to be non ideological because I believe that your ideology, your own personal ideology, always works against you when you're trying to analyze capital markets. People never believe that, but I believe that to be true. The fact is, in a midterm election, the people that focus professionally on the inside baseball of politics have understood how this kind of stuff works for decades and decades.

Ken Fisher: We have always known that in midterms, there is a tremendous tendency for the President's party to lose some power to the opposition party regardless of who the President is. It's also long known that the less popular the president, the more that tends to be true as a force generally. Conventional wisdom has always been that once you get to sort of summertime, usually defined as June, but there's not a lot of precision to that wherever the President's popularity ratings are, are largely at that point indicative of the trend of what will happen in the election in terms of how badly his party will be hurt. That doesn't mean that the President's party can't improve things from there. They can. It doesn't mean they can't make them worse from there. They can.

Ken Fisher: But the fact is, what history has kind of shown is that by the time you get to the summer of the midterms, people have gotten enough of a view of what they think a given president is that their views don't change that much between then and the actual election. So that does not speak well this time for the Democratic Party because President Biden's ratings are lower than any president since polling began at this point in time.

Ken Fisher: On the other hand, for that, many Republicans believe that this should be a wave election in a landslide mode. And that is probably not true. It's probably not true for two reasons, and I'm going to dive down into a few more details, but it's probably not true for two reasons. If we look at Republican wave elections of the past, like the 1994 election or the 2010 election, you could pick up 60 seats in the House.

Ken Fisher: That can't happen this time simply because the Republicans did so well in the House races in 2020, and in doing so well in the House races in 2020, when they picked up so many seats in an election where the Democratic candidate now President Biden, won, that doesn't normally happen. And in 2020, under Kevin McCarthy's leadership, the Republicans kind of, if you will, got the easy ones that normally they'd get in the wave election. Therefore, this may be a wave election, but it's going to have a smaller number of House pickup seats for the Republicans. How many? I don't know.

Conventional wisdom would say someplace between 15 and 35, But that's enough to easily give Republicans control of the House. On the Senate side, it's much more 50 50. If you ask leadership on both sides, they'll say that that it's very 50 50. Neither side believes that they could pick up on the Senate more than a couple, two, three seats at the most. It would take something from here. Truly extraordinary. There just aren't the seats in even states enough of them this time to get much beyond that? It would be very hard for that to Happen. So do not expect this to be a big election for either side. Also, do not expect some single issue. There's been a lot of discussion just recently, as I speak, tied to the discussion on Roe v. Wade. Could that be something that swings things hugely? No one issue will do that. No one issue either way will swing things hugely from here. There might be numbers of issues that come up that can, and in any given race there can be about the personal candidates. But for the overall macros, that's unlikely to happen. Now, there's a couple more features I just want to point out to you. One of them is in 2020 it was true in the Senate races that the Republicans voted better than their final polling numbers in Senate races.

Ken Fisher: If that's true this time also meaning that the polling isn't truly reflective of how people will vote, and if that same underlying bias is there in favor of Republican Senate candidates, then the Republicans probably take the Senate. If not, not at the same time media. This time is more vehement than I've ever seen. And I've always analyzing media and it is unclear to me if the non-ideological voter, the non-Democrat, non-Republican voter who doesn't see themselves as either is going to be believing that media or going to be sort of in the you cried wolf too many times mode about that media. That's another imponderable to be assessed and analyzed as you move forward, closer to the election that'll show up in the final primaries that we see post August recess for Congress. So, in this election, do not expect that. But let me just make a couple more points that people don't think through. There is near infinite power in having a chamber of Congress because the party that has that chamber controls completely what makes it to the floor of that chamber to be voted on.

Ken Fisher: Hence, if the Republicans take the House, which probably they do, they can basically stop all legislation from going through and you move to hardcore gridlock. If the Republicans take the Senate, it's doubly true and everything that passes after that becomes totally non-controversial, things that can be broadly agreed on of which there's almost nothing, what does that do? That creates this feature, that's hardcore gridlock, which creates a calming effect because once that's understood in the bones of businesses and people, the businesses come to understand I've got a longer term time horizon that I can plan for without disruptive potential changes that may hurt me. And capital expenditures increase, capital investment increases. At the same time, investors themselves become more confident that the sands upon which they stand are more stable and they extrapolate that into the future, even though rationally, it isn't clear why they should.

Ken Fisher: And the impact of midterm elections has 85% historical positivity in the stock market in the fourth quarter, sometimes starting in the back part of the thirdquarter that we're in now, that ripples over into terribly positive first and second quarters of the third year of the President's term. The history of third years is overwhelmingly positive, tied to the same gridlock effect as all of the political confrontation of the first two years of political President's terms vanishes via this gridlock benefit. And the calmness that that brings reduces political risk aversion, which increases incentive for investment and motivates higher stock prices, motivates improvement in bonds, and is generally a blessing that people don't ever anticipate. They can anticipate that parties in power may change, but they don't ever anticipate the positive impact that has on markets. This has been going on for decades and decades and decades with midterms.

Ken Fisher: It's one of the most powerful forces that does not for some reason appear to get pre priced into markets because people just are so firm of their view that their political views are right and that if they don't get what they want, it's got to be bad and they don't realize that. It'll just become quiet, it becomes good. So, I think you should look forward to that political outcome regardless of the details of the election. Thank you very much for listening to me.

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A series of disclosures appears on the screen “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. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.”


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