U.S. midterm elections are rapidly approaching. We break down the issues that may have the biggest market impact.


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Kim Nakahara: I’m Kim Nakahara, senior research analyst and portfolio manager for the Municipal Fixed Income Team at Allspring Global Investments, and you’re listening to On the Trading Desk®. Today we have a conversation on the upcoming U.S. midterm elections and why markets should or should not care about their outcomes. Joining us is Brian Jacobsen, Allspring’s senior investment strategist, to provide insights on this topic. Thanks for being here, Brian.

Brian Jacobsen: Oh, thank you so much for having me. It’s great to speak with you.

Kim: Well, here we are. Another four years and we’re facing another round of U.S. midterm elections. Geopolitical events can have a wide range of effects on financial markets. But to begin today, could you provide a history of how markets have performed during midterm election years?

Brian: Yeah, sure, happy to. November and December are statistically stronger months than the rest of the year. November and December, on average, have monthly inflation-adjusted returns that are more than four times the average monthly inflation-adjusted returns for the rest of the year. And midterm years tend to be better than presidential election years, which tend to be better than years where there isn’t an election. So maybe it’s because elections give, most of the time, the majority of people what they want and that makes them happy and then that can maybe improve investor sentiment. I think what’s more important is probably how the election can be a thermometer. By that, I mean the election can reflect how people are feeling and what’s going on economically and from a market perspective, as opposed to actually changing what happens from an economic or market perspective.

Kim: There’s a lot of party control dynamic. So, I want to segue into the next question about Democrats battling to maintain control in both the House and Senate. Can you give us a rundown on how regulations may change with either outcome and then how the markets may interpret these issues?

Brian: With regulations, there’s actually a lot that the President can already do. So that might not really change all that much. If we get a divided government, President Biden will likely lean on executive authority to implement more regulations. I think that the big question then is probably what it means for new legislation. And neither party seems to really care for the growing market share of big technology firms. They seem to agree on the importance of consumer protections and privacy protections, but maybe in slightly different ways. But if there’s a division between the House and the Senate, it seems unlikely that they’re going to really pass any legislation to do anything about just about anything. Now, if Democrats maintain control of both the House and the Senate, it seems to me unlikely that Democrats will gain enough seats to avoid a filibuster in the Senate, although the Senate could change their rules. And so, I would not be too surprised if we do see that happen in the next two years, if you do get some continuity with unified government without any sort of big increase in the presence of Democrats in the Senate.

Kim: Now, finally, I’m going to ask you about an area that affects all markets, but in particular, is of interest to municipal markets where I manage assets. Can you give us a rundown on taxes and budgetary matters and what may be of concern for markets versus what may simply be white noise?

Brian: We’ve seen how currency and fixed income markets reacted to the U.K. Prime Minister Truss’s budget that cut taxes, widened the U.K. budget deficits, and now they’ve actually had to walk back a lot of those. It was a type of Truss tantrum with the British pound falling, government bond yields rising. So, people seem to be really highly attuned to the idea that you got to get some of these budget issues under control. Now, if Democrats retain control of both houses of Congress, we’d have unified government and we’re likely to get budget proposals that increase spending on social and climate programs, but that are likely mostly paid for with tax increases on corporations and high income individuals. And that obviously affects top marginal tax rates, which can affect the effective after-tax yield on municipal bonds. Now, if Republicans take control of one of the houses of Congress, then we’d have divided government and we probably see recurring budget battles, but generally declining deficits. So the dollar and yields are unlikely to be materially affected. Or if anything, maybe the dollar could continue to strengthen a little bit if we get a little bit more budgetary prudence in place. Now, those budget battles, if we do see some of those with a divided government, that could actually be fairly interesting to add value, especially in shorter term, fixed income markets. As for equities, if we keep a unified government, then there’s a chance that corporate taxes could increase. But large publicly-traded companies are so global and adaptable, so big issues. I think that, though, from a market’s perspective, probably not going to amount to much. But now, Kim, I’d love to get a question to you to get your specific opinion on municipal-related topics. So given that local elections are taking place, and I think it’s like 36 governors will be up for reelection, what are some of the areas of interest that tax-exempt investors should be keeping an eye on?

Kim: You mentioned 36 gubernatorial elections this November, but we’re not expecting a lot of seats to flip. And so, we’re not expecting major changes in control. And I think that generally speaking, the election of one individual generally doesn’t impact the markets with one exception, which is Jerry Brown’s second tour of office. But the state of California is the largest issuer in the country and Governor Brown ran on a platform of reducing the state’s debt. And I think you need that confluence of factors to have an impact on the market. I do want to say that states, in particular, generally did well revenue-wise through the pandemic. They built up reserves and I think they’re better prepared for a recessionary scenario than they were a decade ago. So, I think that’s a positive for munis.

Brian: So, when it comes to some of these elections, any change in control that we should be kind of keeping an eye on are that’s likely to happen that might affect the market?

Kim: I think that what’s interesting we’ve seen play out in the last several years is that polling has become much less reliable. So, it is a little bit harder to handicap than it used to be. But I would say that Maine is a state that political watchers are keeping an eye on for potential flipping control. But in terms of its impact on the municipal market, it’s a much smaller issuer of municipal debt. And so, I think that if Maine has a change in the governor’s mansion, it’s going to be less impactful on the market as a whole than, say, a flipping California or a flip in Texas.

Brian: Excellent.

Kim: Happy to share and thank you, Brian, for sharing all of your thoughts and insights today.

Brian: It is my pleasure. Thank you so much.

Kim: That wraps up this episode of On the Trading Desk®. If you’d like to read more market insights and investment perspectives from Allspring Global Investments, you can find them on the firm’s website, allspringglobal.com. To stay connected to On the Trading Desk® and listen to past and future episodes of the program, you can subscribe to the podcast on Apple Podcasts, Spotify, Google Podcasts, or wherever you get your podcasts. Until next time, I’m Kim Nakahara and thanks for listening.





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