In 2020, the U.S. absorbed four significant policy shocks: the global pandemic, a recession, nationwide protests and a change in the presidency.
The reverberations, Dan Clifton contends, will continue to roil the nation through next month's mid-term elections and beyond as lawmakers navigate what is emerging as a new world order.
"This is an inflection point, I believe, for the world and for the United States, and who we elect to Congress really does matter," said Clifton, partner and head of policy research for Strategas Securities. "We're entering a period of deglobalization which appears to be more of a multi-polar world featuring slightly higher inflation, higher interest rates, little bit lower price/earnings ratios on stocks and a preference for value over growth."
Clifton shared his insights in an early October webinar conducted by BOK Financial® and hosted by Steve Wyett, chief investment strategist for BOK Financial.
Typically, mid-term elections don't draw as much attention—or as many voters—as presidential year elections, but amid the generally sluggish economic growth that's occurred since the 2008 global financial crisis, they've served as a referendum on the country's leadership, Clifton said.
"Voters have removed the party in power in seven of the last eight elections, but none of the combinations have been able to get economic growth higher and I think that explains why voters are continually pushing for change," Clifton said. "For the past 10 years or so, our philosophy is that economic volatility is creating political volatility."
Shifting sands quite possible again
This year, economic turbulence has been considerable, given red-hot inflation, soaring interest rates and rising expectations of a recession. Therefore, many are projecting that next month's results will follow form and the Republicans will take back the House of Representatives. The Senate appears to be more of a tossup.
The No. 1 issue for voters this year, according to Clifton? Inflation. With consumer prices running between 8% and 9% higher than a year ago, many believe lawmakers overdid the pandemic-tied stimulus and relief efforts while the U.S. Federal Reserve kept its key interest rate too low for too long.
"The Fed and Congress both did what they did to avoid the risk of a depression occurring as we were in the midst of the pandemic," Wyett said. "The unfortunate part is that in avoiding that risk, they accepted the risk of inflation, and with the benefit of hindsight, we can see that the monetary policy stayed easy too long but also maybe some of the fiscal stimulus wasn't completely needed."
Today's challenges likely enduring
Regardless of party affiliation, Clifton said those elected into office this fall will be greeted by the unenviable task of addressing inflation with a fiscal policy that's already strained by greater interest payments on government debt due to the high-rate environment. At the same time, the Fed will offer little relief as its policymakers are laser focused on snuffing out inflation as opposed to preventing it from rising as they've done since 1982, Clifton said.
"That debt service is going to become a much bigger part of what we're doing, so it might be that fiscal policy has to play a bigger role, but in a different way," he added. "Not just stimulus dollars going out, but changes to immigration policy which help increase the ability of the economy to produce more goods to attack inflation."
Meanwhile, the continued Russia-Ukraine war has elevated grain and energy prices worldwide; convinced China to align itself with Russia; and prompted some nations to pursue non-U.S. dollar alternatives in trade agreements. Plus, legislation to support an expansion of the domestic semiconductor chip industry, which received bipartisan support, has driven a further geopolitical wedge between the U.S. and China.
"These are the challenges that the next Congress is going to face, as well as lawmakers and presidents into the future," Clifton said. "These are probably going to be the themes for at least the next decade if not longer as we begin to transition into this new multi-polar world."
Against this backdrop, Clifton said Democrats' current top three priorities are:
- Expanding the child tax credit
- Expanding Medicaid in states that haven't expanded that program yet
- A refundable credit for clean energy
As each measure requires funding, he said that proposed expanded taxes on multinational corporate entities and the wealthy would likely be pitched again, but unless the Democrats build a stronger majority in the Senate, such reforms will struggle to pass.
Conversely, if Republicans sweep the House and Senate, they have the ability to attach provisions to budget bills and other "must pass" legislation, Clifton said, and work to fulfill their goals of:
- Permanent reform for energy projects, which could ease the permitting process for pipelines and open up exploration policies on federal lands
- Shoring up the country's southern border
The investment perspective
Regardless of how Nov. 8 reshapes Washington, the stock market is poised to benefit if it follows historical trends. A split environment where neither party can push through the bulk of its agenda is generally friendlier to investors.
For example, the combination of a Republican House of Representatives with a Democratic Senate and White House has historically produced a 13.6% annual return on the S&P 500 Index, Clifton said. A Republican House and Senate working with a Democratic President has resulted in 13% annual returns and a Democratic House, Senate and White House has historically produced a 10% return.
"The equity market is not partisan and it figures its way around this type of stuff," Clifton said. "But it generally has liked a divided government, so to speak."
Listen to the webinar
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