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Election Post-Mortem

Wells Fargo Investment Institute - November 27, 2018


Key takeaways

  • A legislative stalemate should allow U.S. equity markets to focus on positive economic trends. We favor positioning portfolios for growth in equity markets. We hold a favorable view of the Health Care and Consumer Discretionary sectors and a most favorable view on the Industrials sector. The Consumer Discretionary and Industrials sectors should benefit from the solid pace of consumer spending, an improved rate of business spending, and steady economic growth overseas. 
  • We believe that divided government most likely will not result in significant market- or economy-moving legislation. Possible exceptions may involve bipartisan infrastructure, health care, or immigration proposals.
  • Markets had a favorable initial response to the election outcome, yet this quickly turned to concern as attention returned to various economic and market uncertainties (e.g., growth, inflation, and trade).

Final thoughts on the midterms

Amid estimates of record turnout (49%) for a modern midterm election, Democrats picked up enough seats to retake control of the House of Representatives. The late-November tally in the House showed Democrats gaining enough seats to take a 233-201 seat advantage. Republicans picked up two Senate seats; the last uncalled race is in Mississippi, where a special runoff election will be held on November 27. Republicans had been a favorite to retain that seat, but recent developments have tightened the race.

The key question remains: will the Democrats, now controlling the House, focus on investigations and oversight of the president and his administration—or will they work with Republicans to pass legislation for the betterment of the U.S. economy and markets? The first approach may appeal to the Democrats’ more progressive, liberal base. The second approach may make Democratic candidates more appealing to a wider audience, and enable them to make gains in the Senate and even the presidency in 2020. We initially heard cordial comments between President Trump and Democratic leadership. Yet, that quickly returned to bipartisan rhetoric. Whether politicians focus on the next election, or address the top issues which concern voters, remains to be seen.

Will politicians address key voter issues?

Exit polling listed health care and immigration as the top two issues for voters in the midterm elections. The Affordable Care Act (ACA) appears to be safe following the Democratic victory in the House. Yet, there is much that needs to be accomplished with regard to improving the state of health care in the United States. Health insurance premiums continue to rise, with silver-tier ACA plans having risen in cost by an average of 32% in 2018.  Further, concerns exist about coverage for those with preexisting conditions. These are issues that are of interest to voters of both parties, and they should be addressed. Differences usually occur with regard to funding (e.g., higher taxes versus cutting federal spending on other programs). Voters remain hopeful that elected officials will make health care the top priority.

Immigration could remain an unresolved issue. Republicans were unable to pass immigration reform or build the wall—even when they held the presidency and both chambers of Congress. Recent migrant activity on the Mexican border is heightening the importance and urgency of action. 

Download the full report (PDF)