3 key takeaways from the U.S. midterm elections | Capital Group Canada | Insights



3 key takeaways from the U.S. midterm elections

Matt Miller, Poliical economist

Capital Group political economist Matt Miller explores what a divided Congress means for the markets.

There is much to digest from Tuesday’s historic U.S. midterm elections. With Democrats gaining a majority in the House of Representatives for the first time since 2011, and Republicans widening their majority in the Senate, each side can legitimately claim a qualified victory. Indeed, that’s exactly the message we heard in dueling press conferences on Wednesday.

Once they are finished celebrating, however, the tough work of governing the nation under a divided Congress will begin. What might that political environment look like? Can they get anything done on the legislative front? What are the likely implications for financial markets?

Here are three key developments that, in my view, will characterize the U.S. political scene over the next two years:

1. Government gridlock

Bottom line: do not expect much substantive change to happen between now and the 2020 presidential election. Major new Republican initiatives – such as additional tax cuts or immigration reform – are highly unlikely to pass, to the extent they require House approval. The same applies to any big-ticket items on the Democratic wish list, such as rescinding last year’s tax cuts, rolling back regulatory reductions or any sort of Medicare-for-all proposal.

Early indications are that the stock market likes this gridlock scenario, as evidenced by the broad-based rally the day after the election. For companies, it means the status quo is likely to remain in place for the next two years. That’s a good thing for chief executives who now can advance their business plans accordingly. As we've seen in past years when the House has flipped, the market tends to take it in stride.


Returns in USD.

2. Limited areas of cooperation.

While gridlock will be the overriding theme in Washington, it wouldn’t surprise me if some limited areas of cooperation emerge over the next two years. For Democrats and Republicans, it simply makes sense to get something done – not just so they can claim to be rising above partisanship, but so they have at least a few accomplishments to trumpet during the next election.

Predicting where this common ground may be found is challenging in such a hostile political environment. It’s entirely possible that no agreements will emerge. But some promising areas include increased infrastructure spending, new limits on drug pricing, a minimum wage hike and paid family leave. All are issues where Republicans and Democrats, at least at one time, had some overlapping interests.

In addition, one risk to the tax status quo involves a potential deal around the federal debt ceiling, which is expected to be addressed in the summer or fall of 2019. At his Wednesday press conference, President Trump signaled a willingness to make some “adjustments” on tax policy in negotiations with Democrats. We’ll have to wait and see what develops there, if anything.

3. It's all about 2020

Needless to say, the U.S. presidential campaign began at midnight Tuesday. Everything must be seen in that context. Whatever happens over the next two years, every move will be calculated and measured based on how it could impact the presidential race. There probably will be new investigations launched by House Democrats. The White House and Senate Republicans may counter with their own.

On the legislative front, House Democrats probably will propose numerous measures that have no chance of passing the Senate. We may see proposals for new taxes on the wealthy, a rollback of corporate tax cuts, and perhaps even an attempt to expand the number of seats on the Supreme Court. Those measures will likely be dead on arrival, but may prove to be valuable talking points come 2020.

Market implications

There’s no telling how markets will react to these events going forward. The sharp selloff we saw in October is a reminder that heightened volatility can return at any time, even when the U.S. economy is humming along nicely. But it’s always worth taking a look at history as one considerable data point.

Since 1950, U.S. stocks have always generated positive returns in the year following a midterm election. That may or may not be the case in 2019. But for investors with a long-term perspective, it’s worth noting that markets have the dynamic capacity to ignore political noise and move to the beat of their own drummer. More often than not, that’s good old-fashioned company fundamentals.


Returns in USD.


Matt Miller
Political economist

Matt Miller is a political economist and corporate affairs advisor at Capital Group. Matt has been a senior advisor at McKinsey, a Washington Post columnist and author, host of public radio's "Left, Right & Center" program and a White House aide for the Clinton administration. Matt joined Capital in 2014.




Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Unless otherwise indicated, the investment professionals featured do not manage Capital Group‘s Canadian mutual funds.

References to particular companies or securities, if any, are included for informational or illustrative purposes only and should not be considered as an endorsement by Capital Group. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds or current holdings of any investment funds. These views should not be considered as investment advice nor should they be considered a recommendation to buy or sell.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not be comprehensive or to provide advice. For informational purposes only; not intended to provide tax, legal or financial advice. We assume no liability for any inaccurate, delayed or incomplete information, nor for any actions taken in reliance thereon. The information contained herein has been supplied without verification by us and may be subject to change. Capital Group funds are available in Canada through registered dealers. For more information, please consult your financial and tax advisors for your individual situation.

Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking statements made herein. We encourage you to consider these and other factors carefully before making any investment decisions and we urge you to avoid placing undue reliance on forward-looking statements.

The S&P 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.

FTSE source: London Stock Exchange Group plc and its group undertakings (collectively, the "LSE Group"). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. "FTSE®" is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under licence. All rights in the FTSE Russell indices or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indices or data and no party may rely on any indices or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company's express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The index is unmanaged and cannot be invested in directly.

Bloomberg® is a trademark of Bloomberg Finance L.P. (collectively with its affiliates, "Bloomberg"). Barclays® is a trademark of Barclays Bank Plc (collectively with its affiliates, "Barclays"), used under licence. Neither Bloomberg nor Barclays approves or endorses this material, guarantees the accuracy or completeness of any information herein and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

MSCI does not approve, review or produce reports published on this site, makes no express or implied warranties or representations and is not liable whatsoever for any data represented. You may not redistribute MSCI data or use it as a basis for other indices or investment products.

Capital believes the software and information from FactSet to be reliable. However, Capital cannot be responsible for inaccuracies, incomplete information or updating of the information furnished by FactSet. The information provided in this report is meant to give you an approximate account of the fund/manager's characteristics for the specified date. This information is not indicative of future Capital investment decisions and is not used as part of our investment decision-making process.

Indices are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in Canada, the U.S. and other countries. All other company names mentioned are the property of their respective companies.

Capital Group funds and Capital International Asset Management (Canada), Inc. are part of Capital Group, a global investment management firm originating in Los Angeles, California in 1931. The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

The Capital Group funds offered on this website are available only to Canadian residents.