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Busy Washington Summer Just a Preview for High-Stakes Fall

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Washington in late summer is usually a sleepy place. The August exodus of lawmakers from the heat and humidity usually means that not much news is made.

This year, however, was different. While the House of Representatives took its annual recess for the month of August, the Senate broke with tradition and was in session for much of the month, confirming judicial nominees, holding policy hearings and working its way through government funding bills for the upcoming fiscal year. And all of that was just a precursor to a very busy fall—with a Supreme Court nomination, a potential government shutdown and the looming midterm elections on the docket.

It can be hard to keep track of it all. So here are a few of the summer’s key developments for investors, as well as a preview of what to keep an eye on this fall.

Trade disputes dominate

Topping the list of key issues for investors is global trade, as President Trump’s aggressive policies have sparked disputes with China and the European Union, as well as our neighbors, Canada and Mexico.

Last week, negotiators from the United States and Mexico announced that they had reached an “agreement in principle” on a new version of the North American Free Trade Agreement (NAFTA). Canada then rejoined the talks, and optimism is high that a new accord can be reached in the coming days. But an agreement would still face a potentially tricky vote in Congress after the midterm elections, likely in early 2019. Given the potential for Democrats to win majorities in the House of Representatives and/or the Senate in November, the prospects for any agreement’s approval are uncertain.

Most of the focus, however, has rightly been on the escalating dispute with China. The United States imposed a 25% tariff on about $34 billion worth of Chinese imports earlier this year, followed by a second tranche on an additional $16 billion worth of goods in late August. China retaliated by imposing tariffs on a similar amount of U.S. imports.

The United States is also considering imposing a 10% tariff on an additional $200 billion in Chinese products. That list of affected goods is currently in a public comment period that closes this week; a final decision is not expected until later this fall. China has identified an additional $60 billion of U.S. products on which it will impose retaliatory tariffs if the United States moves forward.

Thus far, markets have been relatively stable during the U.S.-China trade standoff, with some sectors and companies being impacted more than others. That could change as more products are affected in the next round of tariffs. If and when those go into effect, they are likely to be more noticeable to consumers and investors—in the form of higher prices and a greater drag on the bottom lines of affected companies.

While new tariffs might themselves rattle the markets, the pressure will really be felt politically. Trade is likely to be a key topic on the campaign trail for members of Congress of both parties. If constituents start to complain about higher prices for popular goods—and local employers continue to feel the pinch of Chinese countermeasures—members of Congress may start to feel real pressure at home to push back on the administration’s trade strategy.

Bottom line: The impact of this trade battle on investors has been relatively muted thus far. But that could change this fall.

Supreme Court nominee faces confirmation hearings

As Congress returned to Washington this week, the start of confirmation hearings for Judge Brett Kavanaugh, President Trump’s nominee for the Supreme Court, has been dominating the headlines. Kavanaugh’s hearing before the Senate Judiciary Committee got underway September 4.

Barring any unexpected developments, Kavanaugh appears likely to be confirmed by the full Senate by mid-September, in time to be seated for the opening of the court’s fall term on October 1. Most observers expect all 51 Republicans to vote for Kavanaugh, assuring him of confirmation.

One interesting thing to watch will be whether any Democrats support his nomination. There are 10 Democratic senators running for re-election this fall in states that President Trump carried in 2016—and their votes on Kavanaugh’s nomination are sure to be scrutinized.

We don’t expect significant market impact, but we do expect Washington to be fully occupied with the debate, at least through mid-September.

Progress on appropriations, but government shutdown threat still looms

Congress has also been engaged in recent weeks in a less noticeable but very important task: approving the 12 appropriations bills that fund government operations. Time is tight—the government’s fiscal year begins on October 1, so Congress must approve the funding measures by then or risk a government shutdown (or at least a partial shutdown of those departments whose funding has not been approved).

Thus far, the appropriations debates have been surprisingly bipartisan. By Labor Day, the Senate had approved nine of the 12 bills, including a massive measure that combines funding for the Departments of Defense, Labor, Education, and Health and Human Services. The House, by contrast, had passed only six of the bills. This marks the first time the Senate was ahead of the House’s pace on appropriations bills since Congress changed the government’s fiscal year from July 1 to October 1 in 1976. 

But a lot of work remains to be done in September. Not only must both chambers pass the remaining bills, but each bill must then go to a cross-chamber conference to reconcile differences between the House and Senate versions. A consensus bill then needs to be approved in exactly the same form by both chambers before it can be sent to the president for his signature.

It is unrealistic to expect that Congress will complete all that work by the end of the month. Lawmakers are almost certainly going to pass a temporary measure to avoid a shutdown, ensuring that all agencies are funded at least through the election. These temporary agreements have become annual rites of passage at this time of year, and while more progress than usual has been made on the appropriations measures thus far in 2018, it looks like another last-minute deal will be necessary to avoid a partial shutdown of the government just five weeks before Election Day.

There’s a new face at the Fed

The Senate confirmed Richard Clarida to a four-year term as vice chairman of the Federal Reserve Board of Governors on August 28, as well as a full 14-year term as a governor. Clarida brings a variety of experience to the post. He has been a strategic advisor for more than a decade at the Pacific Investment Management Company, the asset management firm better known as PIMCO, so he knows the markets. He served in the Treasury Department under President George W. Bush, so he knows how Washington works. And he has academic experience, having taught economics at Columbia University for three decades.

Clarida is a centrist who is expected to be a strong ally of Fed Chairman Jerome Powell. No radical change in perspective is likely, but Clarida will be a new and powerful voice as the Fed continues to navigate its planned interest-rate hikes.

Clarida’s confirmation filled one of four vacancies at the seven-member Fed board. Two additional Fed nominees—Michelle Bowman, currently the Kansas bank commissioner, and Marvin Goodfriend, an economist at Carnegie Mellon University—are currently in limbo. Both have been approved by the Senate Banking Committee, but their final confirmation votes in the full Senate have not yet been scheduled.

President proposes ending quarterly financial reports

A presidential tweet ignited one of the more interesting investing-related discussions in Washington this summer. In mid-August, President Trump suggested via Twitter that public companies should report their earnings twice a year instead of quarterly. The proposal caught many in Washington—and the business community in general—by surprise, but the issue has been around for decades.

Trump asked the SEC to study the idea after outgoing Pepsi Co. CEO Indra Nooyi suggested it to him at a meeting with business leaders earlier in the month. After the president’s tweet, SEC Chairman Jay Clayton said in a statement that many investors share the president’s “perspective on the importance of long-term investing” and that the agency “continues to study” reporting requirements.

The idea has generated considerable feedback, both pro and con. Advocates say that companies have long felt unreasonable pressure to hit quarterly targets that discourage longer-term strategies. Opponents argue that less frequent reporting will reduce transparency, deprive investors of important information and lead to an increase in insider trading. Earlier this year, JP Morgan CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett called for eliminating quarterly earnings guidance, but not the quarterly earnings reports themselves. Tesla CEO Elon Musk, on the other hand, has said that quarterly earnings reports were one of the reasons he recently flirted with the idea of taking his company private.

So will it happen? We think it is a long shot. But don’t be surprised if the SEC issues a request for comment this fall that solicits public feedback on the frequency of earnings reports. Such a request would undoubtedly yield a huge response for the SEC to consider.

Retirement savings rules to be analyzed

On August 31, President Trump signed an executive order directing the Department of Labor and the Department of the Treasury to consider issuing rules that make it easier for Americans to save for retirement. One area of focus is allowing small businesses to band together to offer retirement savings plans to their employees. Expanding the use of electronic delivery of plan documents—to reduce costs and administrative burdens for plan sponsors—is also on the table.

But perhaps most interesting to investors and retirees, the order calls for a study of required minimum distributions. Under current law, retirees must begin taking distributions from most types of Individual Retirement Accounts and Qualified Retirement Plans1—such as 401(k)s—at age 70½. The order calls on the Treasury Department to study current mortality tables to determine if the rules should be changed to allow individuals to spread out their distribution over more years. That could even mean increasing the age at which savers must begin taking distributions. 

A recommendation is due in 180 days. If new rules are proposed, they would go through the usual process, which includes a public comment period and a lengthy review. As a result, any actual changes are probably one to two years away. 

Midterm elections loom

With less than two months to go before the November elections, both parties are fully engaged in an intense battle for control of Congress. In the House of Representatives, Democrats are feeling optimistic that they can pick up the 23 seats needed to win the majority.

Republicans are battling history—over the last 100 years, the president’s party has lost an average of 30 House seats in the first midterm election—and the current atmosphere, where polls and pundits suggest that Republicans are indeed on the defensive. Voters tend not to focus on House elections until the final weeks, so a lot can change, but Democrats appear to have a good chance of winning the majority as September begins.

The story is a little different in the Senate, where Republicans hold a narrow 51-49 majority. But just nine Republican Senate seats are up for election this fall, as opposed to 26 seats currently held by Democrats (including two independent senators who caucus with the Democrats). As noted above, 10 of the Democrat-held seats are in states that Donald Trump won in the 2016 election; defending those seats is the top priority for Democrats this fall. Three of the seats currently held by Republicans—open seats in Arizona and Tennessee, as well as Sen. Dean Heller’s seat in Nevada—are considered toss-ups. If Democrats were to sweep those three seats, however, they would still need to win at least 25 of the 26 seats they are defending in order to emerge with a razor-thin majority. It’s not impossible, but it’s a daunting hill to climb.

One thing seems virtually certain, however. No matter which party holds the majority in the Senate, it’s likely to be an extremely narrow margin, perhaps one or two seats. And that’s likely a recipe for gridlock in 2019.

1 Download Schwab’s RMD guide for more information.

What you can do next

  • If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.

  • Watch Schwab experts discuss other market and economic topics in the Stock Market Report.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

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