Stock Market Insights: Get Along Shirt

BY DR. RICHARD L. BAKER, AIF® Founder & Senior Wealth Advisor at Steadfast Wealth Management

"You will wear the Get Along Shirt until you learn to get along.” I have some friends whose two kids are continually fighting. To the shock of the kids, the mom pulls out a 4X tee shirt that says “Get Along” with a big red heart and puts it over both kids. They had to wear it until they learned to get along. Last week’s midterm elections gave us a mixed government, the political version of a big Get Along Shirt for the Republican and Democratic parties to wear together. These next couple of years should be interesting.

There are still some key races not yet decided as I write this, but it looks like we’ll have a mixed government, where more than one political party controls the House, Senate, and presidency, which the market views as a positive. The Republicans will likely take the House, but control of the Senate will be undecided until the Georgia runoff election on December 6, which could go either.

Historically a Republican Congress under a Democrat President has been the strongest environment for the stock market. The second best scenario is a split Congress (with a President from either party) which has produced above-average returns. Eighteen out of 18 times, stocks have done well in the year following midterms since 1950, according to LPL. Of course, that doesn’t guarantee it will this time, but I am hopeful. As a result, I am tilting a little towards Value style in the accounts I manage and favor the Energy and Health Care sectors.

Republicans controlling the House would be a market-friendly outcome regardless of what happens in the Senate. The markets prefer political gridlock because the opposing party keeps the administration and the extremes on both political sides in check.

A result of the Republicans controlling the House is that they would most likely strike down any attempts at tax hikes and be more restrained in government spending. They could also affect the regulatory agenda, which would be more favorable for financials, energy and healthcare. On the other hand, a negative of a GOP House would be their resistance to raising the debt ceiling, which could cause the U.S. to flirt with defaulting on its debt which is a negative to the markets.

The most significant outcome of the Democrats controlling the Senate is that they would have an easier time confirming nominees who have a tougher regulatory stance (for example, coal and green energy). The market would view this as a negative.

I was talking this morning with my cousin Carrie about the “Get Along Shirt Consequence,” and she can’t use it with her kids because “blood would be shed!” It would be fun to put Nancy Pelosi and Mitch McConnell in a Get Along Shirt to see what would happen. It might have the result my cousin feared, but it would be pay-per-view worthy.

Have a blessed week!

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