Brian Perry
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ABOUT THE AUTHOR

Brian has been actively involved in the financial markets for more than 20 years and has worked as a portfolio manager, strategist, and trader. At Pure Financial Advisors, Brian uses his extensive investment background and focus on behavioral finance to help clients navigate turbulent markets and stay on course towards their financial goals. Prior to [...]

Published On
October 5, 2020

Decision 2020: Your Vote and Your Money


Welcome to Decision 2020: Your Vote and Your Money. This special series will examine the outlook for November’s elections, the potential impacts on markets and taxes, and steps you can take now to election-proof your finances. Make sure to check back often so that you don’t miss any of this special series, in which we’ll cover topics including:

  • Who Will Win the Race for the White House?
  • Will the Next Congress be Red or Blue?
  • Do Elections Even Matter for Markets?
  • Would Joe Biden Raise Your Taxes?
  • Should You Defuse Your Tax Time Bomb?
  • Can You Build an Election-Proof Portfolio?

Part 2

 Will the Next Congress be Red or Blue?

Welcome to the second part of this special series Decision 2002: Your Vote and Your Money. In the first installment, we examined the race for the White House, as well as where the candidates stand on some important economic issues. Now we’ll turn our attention towards the legislature and take a closer look at the outlook for the House and Senate races.

As a quick reminder for those that have been out of high school for a while, Congress is comprised of two chambers. The first is the House of Representatives. The House is comprised of 435 members. These 435 seats are allocated proportionally to states based upon population. House members serve two-year terms, and the entire body turns over every other year. The House is the only body that can initiate revenue-raising bills, and also has the right to impeach federal officials.

The second chamber of Congress is the Senate. The Senate is comprised of 100 members, with each of the fifty states allocated two seats. Senators serve six-year terms, and these are staggered so that only a portion (roughly 1/3) of the Senate seats come up for election every two years. In 2020, there are a couple of extra seats up for grabs (35 total) due to retirements and vacancies. The Senate’s jobs include approving presidential appointments, ratifying treaties, and trying any impeachment cases.

Importantly, neither chamber of Congress can pass a law by itself. For a bill to become law, both the House and the Senate must approve substantially identical versions of the bill, and the President must then sign it into law. If the President refuses to sign (known as a “veto”), Congress can override the President’s action and turn the bill into law anyway. But doing so requires a 2/3s majority vote in both the house and Senate.

With that brief civics lesson out of the way, let’s turn our attention to the election outlook. We’ll start with the House of Representatives, before turning to the Senate.

The House of Representatives

Here is the current breakdown of the U.S. House of Representatives. As you can see, the Democrats currently hold a majority, with 232 seats, while the Republican Party has 198 seats. The Libertarian Party holds a single seat, and there are currently four vacancies waiting to be filled.

https://ballotpedia.org/United_States_Congress_elections,_2020#Partisan_breakdown

The website Ballotpedia has identified 39 of the House seats as battlegrounds, with the remainder (396) likely to remain with their incumbent party. Of the 39 battleground races, 20 are currently held by Democrats and 18 by Republicans. The single Libertarian seat has also been identified as a battleground.

The following map shows Ballotpedia’s 2020 House battlegrounds shaded by the incumbent’s or most recent incumbent’s political affiliation.

https://ballotpedia.org/United_States_Congress_elections,_2020#Partisan_breakdown

So, most of the House seats are likely to remain with the incumbent, with less than ten percent of seats truly “in play.” What does this mean for the next Congress?

Well, projections vary. For instance, polling from electionprojection.com suggests that the Democrats will not only retain their majority in the House but even increase it.

https://www.electionprojection.com/house-elections.php

https://www.270towin.com/2020-house-election/consensus-2020-house-forecast

 

On the other hand, data from the website 270towin.com suggests that while Democrats will retain their control, they may lose a few seats.

Of course, polling is inherently volatile, so it is not surprising that different organizations are generating different results.

The important point is that although the size of their majority is in question, almost all forecasts currently indicate that the Democrats are likely to retain control of the House of Representatives. With that in mind, let’s turn now to the upcoming Senate races, where the outcome is in greater doubt.

The Senate

While the Democrats currently control the House of Representatives, the Republican Party rules the Senate. Or more accurately, they lead the Senate. With a majority of 53 members, the Republicans are in charge, but their leadership falls short of the 60-vote supermajority they would need to fully exert their will on proceedings in the upper chamber of Congress.

https://ballotpedia.org/United_States_Congress_elections,_2020#Partisan_breakdown

 

2020 Senate Elections

There are 35 Senate seats up for grabs this November. Twenty-three of those seats are currently held by Republican incumbents, while twelve are held by the Democrats. Breaking those numbers down further, slightly more than half the available seats are considered safe for the incumbent party. On the other hand, sixteen are up for grabs according to Ballotpedia.com. Of those sixteen seats, twelve are currently held by the Republican Party, while only four have Democrats as an incumbent. And therein lies the biggest opportunity for change when it comes to Congress.

The map below shows projected battleground states, colored red or blue depending on who currently holds the seat. Clearly, there is more upside opportunity for the Democratic Party, and more risk for the Republicans.

https://ballotpedia.org/United_States_Congress_elections,_2020#Partisan_breakdown

Again, polling is inherently inaccurate, and different outlets have different projections. Here then is the current Senate race outlook from electionprojection.com:

https://www.electionprojection.com/senate-elections.php

As you can see, the race for control of the Senate is neck and neck and projected to come down to the wire. Given that the Democrats seem almost certain to retain control of the House if the Republicans hold on to majority control in the Senate, it seems likely we are destined for at least a couple more years of divided government, even if Joe Biden is elected President.

However, a Biden win coupled with a strong showing in a handful of key Senate races could turn the country all the way Blue for at least two years. With that in mind, lets briefly look at the interplay between Congress and the President.

Congress and the President

The legislation Congress can enact will be heavily influenced by who wins the White House. Similarly, the ability of the next President to implement their agenda will either be helped or hindered by the makeup of Congress. That is because the President does not have the power to enact laws. He or she can only propose laws; Congress has the sole authority to initiate legislation. However, this Congressional power is checked by the President’s veto power, with which the President can refuse to sign a bill into law, even if both chambers of Congress have approved it. Congress can still pass the law, despite the President’s veto, but doing so requires a 2/3s vote in each chamber, and it is relatively unusual for this to be accomplished. And of course, as part of the system of checks and balances established by the nation’s founders, the Supreme Court provides additional restrictions on the actions of both other branches of the federal government.

As we look out to 2021 and beyond then, the scenario most likely to prompt significant changes in the direction of the country is one in which Joe Biden is elected President and the Democrats control both chambers of Congress. This situation would put both the House and Senate on more or less the same page in regards to passing legislation, and this legislation would be more likely to be in line with Biden’s views and therefore less likely to prompt a presidential veto. Even in this scenario though, the Democrats would probably not hold more than sixty seats in the Senate, which means that the Republicans would still have the ability to restrict or hold up legislation through the filibuster process (please note that there has been some talk that the Democrats would move to abolish the filibuster process which would render this a moot point.)

On the other hand, a second term for Trump, or a Republican Senate victory, likely means a continuation of divided government and the potential for gridlock in Washington. Keep in mind though that the government was intentionally designed to move slowly, and that even in periods of gridlock, the economy and financial markets have generally performed well, despite the frustration many citizens might feel with the perceived lack of progress from their elected leaders.

What does history tell us?

https://en.wikipedia.org/wiki/Party_divisions_of_United_States_Congresses#/media/File:Combined–Control_of_the_U.S._House_of_Representatives_-_Control_of_the_U.S._Senate.png

Many readers no doubt hold strong views on a variety of issues and have long-held opinions on which party is best suited to run the nation. And the composition of Congress will play a key role in the direction of the country over the next several years. However, it’s also important to keep things in perspective. The Republicans and the Democrats have been the main political parties since 1855. During that time, there have been periods when the Republicans controlled both chambers of Congress and periods when the Democrats controlled both chambers of Congress. There have also been instances of split control, where the Republicans led one chamber and the Democrats the other.

Despite these fluctuations in control, America has managed to persevere and often thrive. It’s not so much that politics don‘t matter. More to the point, the U.S. was intentionally designed to be a slow-moving ship. The Founding Fathers wanted to avoid wholesale changes and restrict the ability of any new politician to exert too much control – that was a direct legacy of the colonialists’ experience under English rule. As such, the constitution was crafted to balance power between the president and congress, as well the judicial system.

Furthermore, and more directly related to financial matters, the economy is heavily influenced by a host of factors beyond just the direction of the government. Federal Reserve policy, the strength of corporate America, and global economic growth all play a role in determining the performance of financial markets. So too do the buy and sell decisions of millions of investors large and small. What this all means in practice is that although the government can shape the direction of the economy and the course of financial markets, the actual experience is much more nuanced.

That is why markets have historically experienced periods of strong performance under both Republican-led and Democrat-led Congresses.

The Standard & Poor’s 500 (S&P 500) Index is an unmanaged composite of large capitalization companies. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Conclusion

This article has explored the outlook for the upcoming Congressional elections (click here for our outlook on the Presidential race). The conclusion is that the House seems very likely to remain Blue, while there is greater uncertainty around the outcome in the Senate. But regardless of who wins, it’s important to keep in mind that based on the historical precedent there is no scenario that guarantees markets and the economy will suffer in the years ahead. The reality, as always, is far more nuanced. With that in mind, check back soon for the next installment of this special series on Decision 2020, where we will take a closer look at what impact elections have historically had on financial markets.

 

 

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