With the election behind us, Washington turns its focus to legislative dynamics and what areas might see meaningful progress in a divided Congress.
To read the full article from Washington Policy Analyst Ed Mills, see the Investment Strategy Quarterly publication linked below.
We believe the incoming Congress may offer opportunities for some surprise bipartisan compromises, especially on potential infrastructure, immigration, trade, and government funding issues. The House may produce more headline risk for the market as Democrats gain subpoena and investigative powers, but the current deregulatory track of the Trump presidency will largely be sustained given the Republican Senate’s nominee confirmation powers.
A theme we’re starting to track that may produce an overhang in the coming year is the tilting of the scales from market tailwinds to headwinds on the D.C. agenda. Over the past year, we have seen the deregulatory agenda, fiscal stimulus, and tax cuts dominate the conversation, providing a boost to investor sentiment. Now, with those big-ticket items largely behind us, the focus is turning toward more potential market challenges, particularly trade policy uncertainty, rising geopolitical risk, and the potential for ramped up investigations. We will be watching to determine the impact Congress will have on this transition and whether investors value market fundamentals over perceived risks on the horizon.
In many ways, the election produced a historical result that will heavily weigh on the dynamics of the incoming 116th Congress. The split decision we saw in November (where one party decisively flipped control of a chamber of Congress while the other party added to their majority in the other) is unprecedented in U.S. politics.
Although Democrats won a significant share of the popular vote, they enter the new Congress with a modest majority (235 Democrats, 200 Republicans). Given that almost 20% of Democrats in the House will now be from formerly Republican-represented areas of the country, there will be pressure on those members to produce results for their constituents if they want to keep their seats in two years. This sets up a key dynamic to watch where a faction of Democrats may deviate from their party’s agenda on certain issues and sets the table for some surprise bipartisan compromises in 2019. In our view, infrastructure and immigration stand to be the biggest beneficiaries of the new House dynamics.
The Senate result produced quite the opposite story. Republicans defeated a handful of vulnerable Democrats in Republican-leaning states in order to expand their majority to 53-47. As the Senate controls the confirmation of presidential appointments to key regulatory and judicial positions, an expanded Senate majority allows for an easier and faster confirmation process. This, in essence, locks in President Trump’s executive powers and deregulatory agenda for the remainder of his first term.
The trade dispute with China remains a significant wildcard that threatens to spill over into the technology sector should talks break down. Tariff increases loom large in the fight and are attracting significant speculation, but another “under-the-radar” concern is the restrictions on technology investment and exports that may be the next source of leverage for the Trump administration.
Beyond China, we will see negotiations and potentially a vote to ratify the revised NAFTA agreement with the U.S., Mexico, and Canada (USMCA). Democrats are beginning to voice their opposition to the deal as negotiated, and may use the ratification vote as leverage on other issues. Car tariffs may also attract lawmakers’ attention next year. Trump administration officials have raised the prospect of placing tariffs on car imports again, an effort likely to draw Congressional opposition.
On this issue, both parties start at a common point of agreement that there has been significant under-investment in infrastructure. This raises long-term competitiveness and even safety concerns as deteriorating and unmaintained roads, bridges, and communication networks can constrain economic growth in the long term. However, the two sides are far apart in terms of the size and scope of the plan, and, importantly, on the appropriate way to fund infrastructure investment.
Tax changes to pay for large-scale federal funding will likely be a non-starter with Senate Republicans, and a more targeted $200 billion infrastructure package would likely be dismissed by House Democrats for not offering meaningful investment. The clearest path to a successful bipartisan push on infrastructure lies in both parties needing to claim a win as they run for reelection in 2020. Many of the new House members come from swing districts and will want to avoid being cast as obstructionists. This sets up infrastructure as a natural vehicle for bipartisanship that leads to investment in both rural and urban areas while creating jobs and contributing to continued fiscal stimulus.
Another potential area of bipartisan compromise could be regulation of technology platforms, specifically on data protection and privacy standards, after a series of high-profile scandals in 2018. Landmark privacy standards, similar to the European Union’s enacted General Data Protection Regulation (GDPR), could be on tap given agreement on both sides that “rules of the road” should be set for major technology platforms.
Healthcare emerged as a winning issue for Democrats in 2018 in a way that shifts the debate away from repeal of the Affordable Care Act (ACA) toward a renewed push for lowering drug prices. However, the two sides are likely to approach this issue from vastly different angles, and President Trump likes to keep this issue close as a potential achievement heading into the 2020 campaign. These dynamics may hamper efforts at a significant bipartisan compromise.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.