Status Quo: Gridlock

By: Sam Clement

Although it is not currently the odds-on favorite to happen, if you asked a lot of people this is what their prediction would be: 1) the Democrats maintain the House of Representatives, and; 2) the Republicans hold on to both the Senate and the Executive Branch.

As recently as August, the betting markets had the Republicans as the favorites to win the Senate, however, some recent data in key swing states suggests the path to reelection might not be as clear as originally thought. All this being said, it still remains very well in the realm of possibilities the Senate and White House remain red.

So, what does this mean for Washington if, well, nothing changes. Unless the two sides decide to start playing nice with one another, this probably means one thing: gridlock.

Based on what we have seen over the past four years, we can get a pretty good feel for what is going to happen. As they say, the more things change the more they stay the same. Here are our major implications for a blue House, red Senate, and another four years of Trump.

Our Predictions:

• The is the clearest scenario to predict: four more years of status quo. This will likely drive a continuation in everything from foreign policy to taxes.
• With this scenario calling for four more years of Trump, other countries will likely have to come to the table more than they had previously. Waiting him out may no longer be a valid strategy.
• USMCA will remain in place with Mexico and Canada.
• A continued decrease in the regulatory environment for businesses will remain on track.
• An infrastructure deal is still possible between the two parties as that remains a fairly bipartisan point.
• The Federal government will continue to encourage businesses to invest through tax cuts and other incentives.
• This scenario, we envision, will push the two parties even further apart.
• Business sentiment will remain steady as four more years of the same will allow current business plans to continue, allowing increased expenditures.
• This should lead to a slightly expansionary economy. However, the deficit will likely continue to grow, which could lead to the continued weakening of the US dollar, all other things being equal.
• Finally, the Trump Administration’s blunt use of trade/economic policy as foreign policy, would continue which would lead to further tensions between the United States and other trade partners.

If these things do end up happening, we anticipate making the following shifts in our investment strategy as market conditions and tax considerations allow. The table below outlines the primary economic sectors in the S&P 500, a few sub-sectors when applicable, and other asset classes, and how we envision we will position our clients’ portfolios relative to market benchmarks.

In conclusion, this outcome is still a real possibility. Most of the policies set in place will continue and we will start to view this much like an early cycle economy coming out of a short, but sharp, recession.

While the economy will continue to recover, it will be different than the recovery after the Financial Crisis in 2008. The amount of debt we have piled on since then, particularly within the last year, is astronomical. This will continue to be a factor in our investment thesis going forward.

Again, these are just our thoughts at this current moment based on a future prediction. There are so many variables that go in to place for each of these sectors that our thoughts are ever evolving.

We hope you have enjoyed this series so far, and we will continue next week with our next installment:

What happens if the Democrats win the House and Senate, but the Republicans control the White House.

Read the full 2020 Election Projection series here:

As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.