U.S. midterm elections are coming up in November.
How do you expect that that shapes the markets and our client portfolios?
Let me step back and look at where we've been.
Where we've been has been a Republican House of Representatives and Senate, and Republican
presidency.
They've been able to get a few big pieces of legislation through, the biggest one, of
course, being the tax bill.
The Republicans, as I think probably all viewers know, have a slight margin in both chambers
of Congress.
We have what we have referred to and described in the past as a new form of gridlock, where
Republicans fight amongst themselves more in the Senate than in the House of Representatives.
In that, a lotta stuff doesn't get through.
Some in the House, some in the Senate, a lotta stuff doesn't get through.
That's a new form of gridlock that people aren't used to.
Some gets through.
What we're gonna have after this election is either, and I'll come back to some detail,
but Democrats taking the House by a little, or the Republicans holding onto the House
of Representatives by a little.
The Republicans will hold on to the Senate, and probably gain a seat or two.
We'll have either the same form of gridlock we've had, where Republicans squabbling amongst
each other with paper-thin margins can't get legislation through, or we'll have the traditional
old form of gridlock people have seen forever, where the Republican Party has one chamber,
the Democratic Party has the other chamber, the Republican Party has the presidency, and
legislation doesn't get through.
Whatever it is that you think is good, somebody else thinks is bad.
When you put through heavy legislation, the people that don't like it hate it more than
the people who like it love it.
You get increased political risk aversion.
Political risk aversion falls after a midterm election.
It will fall after this midterm election.
We can talk about the details of the election and how it will look and why we might think
it will come out this way versus that way, but the fact of the matter is that there's
this long history, that I've written about before, that we call the 87% miracle, which
is the most consistently positive streak in market history, which is the quarter that
includes the midterm election and the next two quarters after it.
Each of them in history being positive 87% of the time.
Three in a row, 87, 87, 87.
The notion of that being purely random is very, very low.
Then that parallels, of course, with the overlapping feature, which is the third year of president's
terms in American stock market history have been overwhelmingly positive, where we haven't
had a negative third year of a president's term since 1939, and it really derives from
that same feature, falling political risk aversion.
Clients ask, I find that they ask so frequently, why is it that we think gridlock is such a
good thing?
Ken refers to it as political risk aversion abating, but what does that really mean?
There's different ways of looking at it, but I look at it like this.
The stock market wants to look as far into the future as it can, and discount that.
What politics is, effectively, is creating the rules of the game.
When you have a situation where the rules of the game aren't changing, it allows investors
to at least have the belief, they may not really know, but they'll have the belief that
they can see further out than they could before because the ground underneath them is not
shifting.
That's why we tend to say political changes of all kinds, we're agnostic to.
We don't take one side or another because it's the change itself that alters the course
of the future.
That makes things less unclear.
You can't see into the future as far, at least believe you can.
In the absence of change, people can have more confidence because they believe they
can see further out.
That's a bullish thing.
That's why we think gridlock is such a good thing for the market.
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