Some Thoughts on the Election

Overall, the 2018 mid-term elections went the way they were broadly expected, with the Democrats capturing the House and Republicans holding on to the Senate, even gaining a few seats. As we have previously noted, Americans in general and the stock market in particular like divided government. The Dow and S&P 500 were both up about 2.1% on Wednesday (11/7/2018) in the best post mid-term rally since 1982. As far as Mr. Market is concerned, gridlock is good. In fact, we could probably count on one hand the number of major pieces of legislation that contributed to a significant stock market gain. Quite often, it's the opposite.

The fact that Republicans held the Senate means that President Trump may be able to appoint another Supreme Court justice during the remaining two years of his term. Based on the Social Security mortality table, we estimate a 25% probability of this occurring. As this article is being written, news just broke of Ruth Bader Ginsburg being hospitalized for a fall that resulted in three fractured ribs.

The map of the upcoming 2020 elections in the Senate suggests that even though there will be many more Republican seats up for grabs, Democrats could fail to capture the Senate because those seats are mostly in strongly Republican states. Thus, even if a Democratic candidate wins the Presidency in 2020, he or she may find it difficult if not impossible to successfully nominate a Supreme Court Justice.

Regarding the 2020 Presidential election, there was some rather ominous news for President Trump. You may recall that the three swing states which gave Trump his electoral college victory were Michigan, Pennsylvania, and Wisconsin. Unfortunately for Trump, in all three of these states, Democrats won both Senate and gubernatorial elections, and they even managed to flip some House seats. Furthermore, in the states of Texas, Florida, and Georgia, which Trump won in 2016, even though they stayed red, the statewide races were very close.

Of course, a lot can happen in the next two years, and nobody can deny that we live in interesting times. Hopefully, for the financial markets, it will be a blessing rather than a curse.