Well most likely because over the past 21 midterms the President’s party has, on average, lost 30 seats in the House and four in the Senate. In just 2 midterms did the President’s party gain seats in both houses of Congress.

What that means is that typically midterm elections bring a switch in party control to at least one chamber and gridlock. You might think gridlock is bad for stocks, but in fact it actually helps companies. That’s because when we have a split government then no major or radical policy changes are typically possible. The status quo remains intact (today that means less regulation and lower corporate taxes) and companies can better plan their long-term investing decisions.

What about 2018? Well according to fivethirtyeight.com, the most accurate election forecaster of the past decade, here’s how the final probability of this year’s elections stands, as of election day itself:

  • Probability of GOP losing the House: 81.1%
  • Probability of Democrats winning the Senate: 18.9%

These probabilities have been pretty stable for the past few months, meaning that, barring some shocking outcome Tuesday night, the stock market has already priced in gridlock in Congress. Remember that it takes control of both Houses, AND the White House to get major policy changes done in today’s hyper-partisan political climate. If the Democrats win the House they can PROPOSE anything they like, including corporate tax increases to 90% if it so tickles their fancy. It would NOT pass the Senate and even if it did Trump would veto it. It would then require a ⅔ vote in BOTH Houses to override that Presidential Veto. Thus the risk of corporate taxes going up in 2019 is effectively zero.

What about increased regulations? Well, Trump has been reducing regulations at a record-breaking clip, via executive order. That means he doesn’t need either chamber of Congress to sign off on it. But what about a Democratic House impeaching Trump? Sure the House can do that. BUT it takes 67 votes in the Senate to remove a president. Thus even that scenario is extremely unlikely. The worst that might happen is that the Democratic House, frustrated at not being able to get anything into law, might impeach Trump just to put him through the political circus that would entail.

But while that would be a major political distraction that would unfold over years, that scenario would similarly not change anything substantive for corporate planning purposes. And don’t forget that on August 22nd Pelosi (the minority leader in the House right now) said that impeaching Trump was “not a priority”.

Basically, this means that the most likely outcome of the 2018 midterms is, as usual, gridlock in Congress. Which means that most likely stocks will rally over the next year, and finish both 2018 and 2019 with solid gains. Anyone who makes the mistake of getting out of the market due to political fears is likely to deeply regret that decision.


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