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Economic and Market Commentary

U.S. Mid-Term Election Outlook

Libby Cantrill, head of public policy, discusses the current U.S. political environment, how we think the mid-term elections are likely to go, and what it could mean for fiscal policy and the markets.

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Text on screen: Libby Cantrill, Head of Public Policy

Libby Cantrill: The political environment can change very quickly. It has changed for Democrats pretty significantly over the last few months with declining gas prices, the overturning of Roe v Wade and President Biden seeing some legislative wins. With that said, our base case for the midterms, if the election were held today, is that Republicans would still win back the House.

Democrats have a very small majority, only a five seat majority in the House. And because of redistricting and retirements in some key districts and also generally a pretty negative view on the economy among voters on both sides of the aisle, we still expect Republicans to take back the House, albeit by a smaller majority,

Images on screen: US Capitol, Senate Floor

than they would have if the election had been held at the beginning of the summer.

The Senate is truly it's kind of a different ball of wax, only 35 of the 100 are up for reelection. Of those 35, Democrats are actually defending fewer seats than Republicans. Ostensibly, though, the control of the Senate will really come down just to a handful of races.

Those include Nevada, Georgia, Pennsylvania and Wisconsin. Ohio and Colorado, and Arizona may also be important,

I think our view at this point is the Senate really is a toss-up, maybe with slight odds favoring Democrats controlling the Senate, but really probably more of a jump ball.

Text on screen: Regardless of which party wins, we expect the Senate majority will be narrow

Images on screen: US Capitol

And I think that the bottom line, though, is that regardless of which party wins, the Senate, the majority, will be very, very narrow.

There are a few things that folks should pay attention to as we get closer to the midterms.

Usually debates, midterm debates aren't very important. But this cycle they could be important, particularly on the Senate side, particularly among those states that we that we just mentioned.

Text on screen: TITLE – What could impact election outcomes? BULLETS – Candidate debates, Economic sentiment, SUB-BULLETS – Price of gas, Price of groceries, BULLETS – Voter enthusiasm

Candidate quality really does matter for the Senate races. So as folks are able to learn more about the candidates through those debates, we could see those be inflection points. And then just the general mood, particularly the mood on the economy.

Folks are really paying attention to the price of gas, the price of a gallon of milk. And so what those look like as we get closer to the election will matter as well. And then lastly, just the level of enthusiasm.

The party out of power usually feels highly engaged going into a midterm cycle. But you're also seeing very high engagement enthusiasm levels on the Democratic side.

We expect this to be a very high turnout election, but that is something as we get closer to the midterms, we'll have better clarity on.

So I think under the two most likely election outcomes, whether it's a split Congress, meaning that Democrats lose the House but keep the Senate or a Republican Congress, meaning that Democrats lose both the House and the Senate. The market implications, the policy implications are relatively similar. Under both scenarios, we expect really gridlock. President Biden's legislative agenda will very likely be put on ice.

Text on screen: We expect gridlock on Biden’s agenda, including no increase in taxes

Images on screen: White House, US Capitol

I think specifically that means that we will not see any tax increases. The next real inflection point for taxes will be when President Trump's tax cuts expire at the end of 2025.

We should also expect more oversight of the Biden administration on things like the troop withdrawal from Afghanistan and what's happening at the southern border and on the recently announced student loan policy. And in fact, if Republicans take the House, I think we should expect them to bring a lawsuit. Trying to stop that that student loan cancelation policy.

Text on screen: TITLE – Policy implications of our base case include: BULLETS – Frozen legislative agenda; More oversight of the Biden administration; Policy volatility, including on government funding; Decreased fiscal accommodation

So legislative agenda frozen, more oversight of the Biden administration. Also more policy volatility on things like funding the government, on raising the debt ceiling. So we could see some subsequent market volatility associated with that.

And then lastly, the most important point is that we should expect not to see fiscal support like we have over the last three years.

We've basically had not only kind of a punch bowl in terms of monetary policy and very accommodative monetary policy. We've also had very accommodative fiscal policy. The Fed, of course, is sort of taking that accommodation away.

Images on screen: The Federal Reserve, US Capitol

And I think very, very likely if Republicans at least win back one chamber of Congress, we should see something very similar, sort of a fiscal policy retrenchment.

This is even in the case should the economy slow into recession. So this sort of fiscal put, so to speak, is not necessarily something that investors can rely on.

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