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WashingtonWise Investor: Episode 34

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Will the Markets Get What They Want From Washington?

A flurry of executive orders and a new administration mean plenty of changes in Washington. But the markets are anticipating economic stimulus, faster vaccine distribution, and more. Can D.C. deliver?   

Minus the daily tweets that drove the news cycle for four years, Washington has settled into a different rhythm. In this episode of WashingtonWise Investor, Mike Townsend is joined by Liz Ann Sonders, Schwab’s chief investment strategist, to consider what’s driving the markets and what it will take to meet expectations. They also discuss what investors have learned from recent hyper-speculative trading, the impact on the markets should corporate tax rates rise, and how the building and bursting of micro-bubbles can impact the entire market.  

Mike also considers how the next round of economic stimulus is shaping up and moving through Congress, how regulators and lawmakers are investigating the need for more regulations in the wake of recent market volatility, and how recent departures in the House bring new pressure on Speaker Pelosi’s ability to hold her party together.

WashingtonWise Investor is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

MIKE TOWNSEND: It can often seem like Washington is a place of constant change, especially after an election: new president, new administration, new Congress, new faces in leadership positions, a new energy.

The first three weeks of Joe Biden’s presidency have seen numerous dramatic changes, from far less tweeting to the 48 executive orders and other actions that have undone dozens of rules, regulations, and policies put in place by the previous administration.

And yet in other ways, Washington feels eerily unchanged. The pandemic rages on. Federal employees continue to mostly work from home, keeping Washington’s streets and office buildings strangely quiet. The same bitter partisan divide persists on Capitol Hill—and with the narrow margins in both chambers, that divide may have gotten even tougher to navigate. And for the second February in a row, the Senate is occupied with a Donald Trump impeachment trial.

Faces and players change in Washington all the time. But getting real change accomplished through legislation is harder than ever. And we’re seeing that play out now as Congress wrestles with the size and scope of its latest economic stimulus package.

One thing, though, does seem very familiar: Tom Brady won another Super Bowl. Some things really never change.

Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation’s capital and help investors figure out what’s really worth paying attention to.

This week, I’m delighted to have Liz Ann Sonders, Schwab’s chief investment strategist, as my guest. In just a few minutes, Liz Ann and I will talk about how the market is reacting to the first weeks of the new administration, the possibility of more stimulus, the acceleration of vaccinations, and more.

But let’s begin with an update on some of the stories at the top of the news.

Late last week, both the House and Senate approved the budget resolution, which is the critical first step in the legislative process to pass the next round of economic stimulus. The budget resolution is the framework into which the stimulus package will be inserted.

Importantly, it triggers the process known as “budget reconciliation.” That’s the special set of rules that prohibits the bill from being filibustered in the Senate and allows it to be approved with a simple majority of 51 votes. It means that Democrats can pass the entire stimulus package without Republican support if necessary.

The next steps started this week. A dozen House committees are now filling in all the details, turning President Biden’s $1.9 trillion proposal into actual legislation. Each committee has an assignment to draft the parts of the proposal that are within its jurisdiction. Once that happens, the House Budget Committee will assemble all the pieces into one giant bill that will be voted on by the full House.

The Senate is undergoing a similar process, and ultimately the two chambers will have to pass the exact same bill.

The committees will be working from the general outline of President Biden’s proposal. That includes the $1,400 stimulus checks for most Americans and a plan to increase the enhanced unemployment benefits from $300 a week to $400 a week and to extend that program, which is currently set to expire on March 14, through August. The proposal also includes money for state and local governments; money for schools and colleges to re-open; money for public transit, for small business, for nutrition programs; money for an expansion of COVID-19 testing and vaccine distribution; money for rental assistance; an expansion of the child care tax credit, and more.

Of course, the details are likely to change some as Congress works through the drafting of the bill over the next week or two. Lawmakers on Capitol Hill have their own ideas about things to add or subtract, and the numbers may get tweaked along the way. But expect the general contours of the plan to stay the same.

So is this a done deal? Well, not yet. Remember that there are exactly 50 Democrats in the Senate, with Vice President Kamala Harris ready to be the tie-breaking 51st vote. But that means that all 50 Democrats have to be on board with this stimulus proposal—and that isn’t certain yet.

Some Democrats in the Senate are concerned about the total cost of the package. Some are concerned about those $1,400 checks and who should get them. So there’ll be a lot of negotiating just among Democrats over the numbers and the details to make sure there is universal support.

Meanwhile, the White House is still hoping to get some moderate Republicans to support the proposal, though I think that is unlikely at the $1.9 trillion price tag.

Earlier this month, in one of those rare signs of bipartisanship that I’m always on the lookout for, a bipartisan group of Senators went to the White House to speak directly with the president about a compromise proposal that they felt they could all support. But the cost of that proposal was $618 billion—about one-third of what the president has been asking for. And there is not a lot of hope for bridging that gap. That’s why Democrats are forging ahead with the budget reconciliation process that will allow them to pass a bill fairly quickly with little or no Republican support.

As far as timing, the goal of Democratic leaders is to get this through Congress by March 14—that’s the date when those enhanced unemployment benefits expire. But to ensure there is no lapse in those benefits, Congress probably needs to pass the bill a week or so before that date.

That timeline is plausible, but ambitious. And it feels like a lot could still go wrong and throw off that timing. I think the markets are confident that a package will get finished sometime next month, but it’s not likely to be a straight path from now to then. Rarely in Congress does legislation get passed quickly and easily.

Another big story over the past few weeks has been Washington’s reaction to the retail trading frenzy that sparked major volatility in the markets. I think we’re all familiar at this point with the Reddit-fueled rollercoaster ride of companies like GameStop and AMC Entertainment, the movie theater chain. Now Washington policymakers are getting involved.

Last week, the new Treasury Secretary, Janet Yellen, convened a meeting of the key regulators, including the acting heads of the SEC and the CFTC, the Commodity Futures Trading Commission, as well as Fed Chair Jerome Powell and the president of the New York Fed, which closely monitors the mechanics of Wall Street. The meeting was focused on how the markets reacted to the volatility and whether new regulations are needed as technology continues to make markets more accessible and social media plays an increasingly central role in fueling retail stock-trading activity.

Yellen said after the meeting that the market had remained “resilient” through several turbulent days of trading and added that the regulators had agreed that the SEC would produce “a timely study of the events.”

The high-profile meeting was a clear signal to the markets and to investors that the administration is watching the situation carefully—and left no doubt that the highly respected Janet Yellen will be playing a very public role in overseeing the financial system for the Biden administration.

Congress is watching carefully, too, and next week, lawmakers will get their turn to dive into the details. On February 18, the House Financial Services Committee will explore this topic at a virtual hearing with a snappy title: “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide?” As of this recording, the lineup of witnesses for that hearing had not been announced but reportedly could include officials from the Robinhood trading app, from GameStop itself, and from a hedge fund, among others.

The new chairman of the Senate Banking Committee, Senator Sherrod Brown of Ohio, announced that his committee would also hold a hearing, though no date has been set for that yet.

That committee will also hold the confirmation hearing for the president’s nominee to be SEC chair, Gary Gensler. The date of that hearing hasn’t been set yet either, but don’t be surprised if Gensler’s nomination process is accelerated a bit as a result of the recent volatility. SEC chair is not typically a top priority when it comes to confirmations, as new presidents focus first on getting Cabinet members and nominees for other higher-profile positions confirmed. Former SEC chair Jay Clayton was nominated on Inauguration Day four years ago, January 20, 2017, but he was not confirmed by the Senate until early May.

Whenever his hearing takes place, Gensler is expected to face tough questions from Senators about whether more regulation is needed to protect investors and reduce conflicts of interest in the markets.

Well, that’s just one of the issues I’m going to explore on my deeper dive today. I want to take a closer look at how the markets are reacting to the steady flow of news coming out of Washington. And there’s no one better to help me do that than Liz Ann Sonders, Schwab’s Chief Investment Strategist. Liz Ann, welcome back to the podcast.

LIZ ANN: Thank you, Mike. I always enjoy our time together on these. So thanks for having me.

MIKE: Well, there’s lots to talk about. Right now, it seems like the market is anticipating two things out of Washington, significant stimulus and a rapid acceleration of vaccine distribution. So let’s begin with the stimulus bill. Democrats are making progress on a stimulus package that they want to pass by early to mid-March. And they’re aiming at $1.9 trillion, but they may be willing to go with a smaller amount to try to get some Republicans onboard. So has the market already priced in a major stimulus bill? And, if so, how much does the final number really matter?

LIZ ANN: Yeah, I mean, that’s sort of the unanswerable question, to be perfectly honest. It’s always difficult, as you know, Mike, to unpack various drivers, perceived or otherwise, of what the market is doing, even in the long term, let alone in the short term. So I think that the notion of getting something more on fiscal relief has been, arguably, part of the sort of bull thesis that the market has been operating under. I’m not sure that specific details on whats in the final package, what the number is, is, in and of itself, going to be a market mover. Again, there’s always so many other things that happen. I’d been saying … and it looks like something’s going to happen, but up until we had a sense of that, the way I would answer that is that, yes, I think something’s in there, which means that maybe a risk is if nothing happens. I think that’s largely off the table. And, again, I’m not sure that the size of the ultimate package matters to a significant degree. If something completely fell apart and we didn’t get something, which I assume you think is a very low risk, I think … I think the market is … it’s not a non-event, but I don’t think it’s a major mover.

MIKE: Well, it seems clear at this point that the stimulus bill will be deficit spending. Once a stimulus bill happens, and I agree with you that I do think it will happen, the administration and Congress will start working on another major bill, one that could include things like infrastructure spending, perhaps measures to address climate change or healthcare. But unlike the stimulus bill, the next big package is almost certain to include increased taxes, and, particularly, increased taxes for corporations. So how do you think markets will react to changes in taxes? For example, there’s some expectation that a relatively small increase in the corporate tax rate will be acceptable, but too large an increase will be problematic for companies and could thus be a negative for the markets. How do you see that playing out?

LIZ ANN: So, you know, on that latter point in terms of impact on the market of changes to corporate taxes, I think that that … there’s a lot of validity to that view that there is something sort of baked into expectations of tax increases. And I think that the market having priced that in, I don’t think it’s going to be a surprise to anyone, some, you know, shock out of the blue that tax rates are kind of part of the potential policy changes here, and, arguably, the market has done quite well even under that assumption.

Now, that may mean that there’s some sort of threshold in terms of increased corporate taxes that might hit the market, but the reality is if we go back to when the 2017 tax cuts were passed, some point to that as being a primary driver of why the market did so well. I think there were myriad drivers of why the market did well. And, in fact, if you look at what the sort of proposal for lowering corporate taxes back then—in terms of what the hope was for what it would stimulate—it was to see a big pickup in business capital spending. We actually didn’t see that, and part of the benefits of lower corporate taxes were offset by the sort of dampening of animal spirits associated with tariffs. And that’s part of the reason why the proceeds from the lower corporate tax rate went more into sort of dividends and stock buybacks, not into parts of the economy that was one of the stated purposes.

In addition, you go back in history and you look at just broad tax rates, you know, extremely high in the ’50s, ’60s, ’70s, and the market did incredibly well, less well in the more recent period of time where tax rates are lower. And the point isn’t that the market likes higher tax rates and doesn’t like lower tax rates; the point is that there are so many other forces that impact what stocks are going to do. And you also have to look at what the actual effective tax rate is at the company level, at the sector level, because we saw, you know, a 14 percentage point drop overall at the federal level, but the actual impact across companies and sectors was, in many cases, much smaller than that. So some of it will also be the devil in the details.

MIKE: Liz Ann, from an economic perspective, stimulus is only half the puzzle. The other piece, I think, is the vaccine rollout, which got off to a slow start. There’s a lot of pressure to accelerate vaccinations with the idea that later this year, that will help things get back to normal, the economy can really take off. Is the market putting too much faith in the administration’s ability to get this done?

LIZ ANN: I don’t know if the market is putting too much faith in the administration getting something done. I think the market is grappling with what we know has been the case, which is difficulty in rollouts, the fact that states are in control, and some have handled it better than others. To me, I think the market is more focused not so much on the specificity around the rollouts and what that looks like, but I think the market, for the most part, is pricing in that when we hit that point of sort of maximum vaccinations, the combination of that with herd immunity, what we hope is continued decline in incidents of the virusand, in turn, the impact of the virus on the economy—that this sort of pent-up demand is going to be unleashed to a significant degree and cause a pretty sharp upward trajectory in the economy.

Where I think there is a risk is that when you think about kind of the post-vaccine world, there’s more … when you think about pent up demand, it’s more on the services side of the economy than it is on the goods side of the economy. If you think about how strong goods consumption and production has been really throughout, certainly in housing, anything housing-related, electronics, you know, home improvement, even automobiles. And then you think about the nature of pent-up demand as it relates to services is just very different. You know, my hair is longer than it’s ever been. Mike, your hair looks pretty long, too. We have the benefit of seeing each other, even though the listeners do not. But, you know, I might have missed five haircuts since the pandemic. When I go to get one, I’m getting one haircut. I’m not going to make up for what might have been 70 restaurant reservations that I would have otherwise had, and when things open back up, I’m not going to go out to eat for breakfast, brunch, lunch, tea, dinner, and dessert just to make up for that lost amount. You’re not going to take six vacations in a row. So I just think we maybe need to curb our enthusiasm, that the pent-up demand story, it’s just very different an animal when it comes to the services side of the economy versus the goods side.

MIKE: That’s a great point, really interesting example. Let me shift gears a little bit. There’s been quite a shift in style in the White House, starting with the fact that the market is no longer reacting to multiple tweets a day. How do you think the market is reacting to the Biden presidency, generally, and what do you think the markets are looking for out of the new president?

LIZ ANN: So, again, it’s … you know, trying to unpack individual drivers, political or otherwise, is difficult. There are certainly some that are arguing the sort of lower level of kind of chaos and less need for all of us to check Twitter first thing in the morning for fear of, you know, something major, either on a policy front or some other announcement, that that’s part of the success of the market. There’s no way to quantify that. So I would say that, certainly, the story that some were telling, no names to be mentioned, that there would be this immediate calamity in the market by virtue of prospective policy changes—including what we already talked about on taxes, on regulations—has not come to fruition, obviously. Now, whether it’s because the recovery so far is happening more swiftly, the outlook for earnings, we’ve got sort of just a momentum-driven market that often feeds on itself without regard to macro or micro fundamentals—they’re all in the mix. But I think maybe a sort of the volume coming down a little bit, a little bit less chaos, you know, you could certainly argue that that’s part of the recipe for what has been a better market environment.

MIKE: You mentioned the momentum-driven market. So let’s talk about what’s been in the headlines over the last few weeks, and that’s the extraordinary volume of trading that’s been going on in a handful of stocks that’s led to some wild rollercoaster rides in stocks like GameStop and others. Much of the action has been fueled by retail investors using Reddit and other social media to discuss their strategies. Some market watchers have been characterizing this as kind of an existential shift in the markets that’s putting more power in the hands of the little guy investor against traditional Wall Street. How do you see what’s been happening? Are you concerned about ordinary investors getting involved in this kind of speculative trading? 

LIZ ANN: So I do think that what we’re in the midst of is, to some degree, existential, and, you know, the next chapter in the longer-term democratization of investing. But the heightened focus in the last couple of weeks, I think, masks the fact that the increased participation by retail traders, you really can go back to last summer to see when that first started to really accelerate. And there have been reports and an attempt at segmenting out just how powerful retail traders have become in terms of percentage of trading volume. Citadel, which, of course, has been in the news in the last couple of weeks with regard to the trading in heavily shorted stocks, has been out there as far back as last summer with estimates that retail trading has accounted for 20 to 25% of trading volume. And then, of course, there’s sort of the feeder effects, either in the individual stocks that they might start that momentum surge, and then whether it’s hedge funds or other institutions kind of climb onboard, what happens in the options market with market makers and purchasing the stocks as hedges. So it does become a little muddy in terms of specifically defining retail trading as a driver versus other trading.

I think what generated so much attention is that unlike last summer, where most of the retail activity, arguably, speculation, interest, hype, whatever term you want to use, was in a lot of the big dominant names in the stock market, traditional names, the FAANG-type stocks, the big five kind of stocks. What I think caused the spotlight to be brighter is the fact that it went narrower and narrower through this process of rotation, and, of course, fueled by Reddit and other social media platforms into much smaller segments of the market.

And it wasn’t just heavily shorted stocks, of which GameStop, obviously, was the poster child, but there have been other themes. And, unfortunately, the theme around some of these hot areas this year, in addition to heavily shorted stocks, which don’t typically have any fundamentals of note to justify the buying, non-profitable tech companies, that’s been another kind of hot area, weak balance sheet company stocks kind of catching up to stronger balance sheet stocks, a lot of activity in penny stocks, you know, the cheaper the stock, the more the interest. That is sort of this next chapter, and, as a result, I do worry a bit about that, because here’s a lot of speculative trading in parts of the market where there’s really no fundamental underpinnings for it.

The good news is these are such small segments of the market that where you’re seeing this excess speculation, I don’t think it has yet become a broader infection in the market. And maybe one of the good things that happened with the GameStop saga is the speed with which we saw a complete roundtrip. And what we hope, of course, is that’s a valuable lesson to traders about the difference between speculating and having it based purely on momentum—and the sort of the greater-fool theory of I just need somebody to buy it back from me at a higher price tomorrow—that some of the education may have been forced on these traders by virtue of the speed with which we saw reversals in those areas.

So, yes, I worry about it, but I think we’ve learned some valuable lessons. And so far, anyway, the infection is, again, in these small subsets of the market.

MIKE: So I think I hear you saying that you don’t see this as a systemic risk. I mean, obviously, Washington has become very interested in this whole topic. You’ve got Congress looking at it, you’ve got regulators, you have the new head of the SEC, who will be all looking at this from various angles. But Janet Yellen at Treasury and the Fed had been paying particular attention, because, obviously, one of their primary responsibilities is making sure that some frothy trading in a handful of stocks doesn’t morph into a larger event that puts broader financial stability at risk. So do you think there’s any systemic risk here?

LIZ ANN: Well, we started to see the potential for systemic risk during the sort of straight-to-the-moon phase of GameStop and to a lesser degree a few other stocks, in the very high-profile situation of Melvin Capital, a large hedge fund that had a short position that ended up being larger than the entire float of GameStop. So that’s sort of one issue that I think regulators are going to look at more carefully. And, of course, what it also unleashed, at least before Melvin got the liquidity infusion from Citadel and Point72, was, in addition to them having to cover their GameStop short, so buying the stock, which further pushed it up, they were raising liquidity by selling other stocks in which they had profits and where they could raise liquidity very quickly.

So that was the potential systemic event where the need to sell to meet margin calls or other liquidity requirements sort of feeds on itself and starts to infect broader swaths of the market. That’s similar to what happened in ’98, with the fall of Long-Term Capital Management, where, in that case, basically, the bailout was coordinated by the New York Fed. It wasn’t just two other, you know, hedge funds coming in to kind of partner. So, yes, it’s something that we should be mindful of, but it was sort of nipped in the bud very quickly, at least in the case of the heavily shorted stocks.

And to the extent that heavily shorted idea of this is the get-rich-quick scheme, you know, two important messages I think to your listeners, Mike.

One, historically, going back beyond just 2021, the most heavily shorted stocks’ performance has been quite weak. If you go all the way back to 1993, and you break the market, the entire Russell 3000, almost all the publicly traded stocks, into quintiles based on short position, the stocks with the most heavy shorts are the biggest underperformers and the least-shorted stocks are the biggest outperformers. So this year-to-date trend of heavily shorted stocks killing it, it is completely in contrast to what has happened over the long term.

In addition, there’s a 20-year low in the percentage of stocks on the New York Stock Exchange with kind of an outstanding short position. So there’s not a big pot from which to sort of choose in this recent sort of bout of where that speculation has been targeted.

So I think those are kind of two important messages that have gotten maybe lost in some of the juicier headlines around this.

MIKE: That’s terrific advice, Liz Ann, and segues nicely into my last question, which is about bubbles. We’ve heard a lot about bubbles in recent days, mini bubbles, in particular stocks, and as you pointed out, many of those bubbles popped almost as quickly as they expanded. But some analysts had been warning that these mini bubbles are just symptoms of a much larger bubble in the market itself and that excessive investor sentiment could pop that bubble. So do you think we’re in a bubble?

LIZ ANN: I think we are experiencing some micro bubbles, which is what I’ve been calling them. And I’ve used that term long before just this most recent experience. I actually talked quite a bit about that at the end of 2017, notably at Schwab’s IMPACT conference. And one of them that I highlighted as an example at the time was what they were calling a short vol bubble. At that time, in late 2017, there was massive speculation in instruments, in vehicles, that were betting that volatility would stay low for an extended period of time. Well, we got a quick volatility spike in January of 2018, and it basically wiped out those investments. So that was an example, an earlier example, of kind of a pricking of one of these micro bubbles that didn’t take the entire market down with it.

You know, a lot of comparisons between now and circa 1999, 2000, and I think many of those comparisons are valid, especially in terms of various sentiment indicators. Whether it’s, you know, as I mentioned, extremes in the options market, or Citi Group has a panic/euphoria model that is through the roof in euphoria. There’s other behavioral measures of what investors are doing that suggest that they’re at least complacent, if not overly euphoric. But I’d say the important difference between now and that environment in ’99 and 2000 is that there was a lot of just silliness around valuation excess at that time. There was justification of valuations. You might remember, Mike, folks, people saying, “Let’s replace the E in earnings in the P/E—the denominator—with eyeballs.” Companies literally just adding “dot-com” to their name, even if they had nothing to do with the internet. But the reality was that valuations went into the stratosphere because prices were going up faster than earnings, but earnings were also going up, ultimately, into a peak in 2000.

The most important, I think, difference between then and now is that the spike in valuations this time came because of the collapse in earnings. And now we’re on an upswing in earnings, and just in the last couple of weeks, the forward P/E for the S&P 500® dropped from 27 to 22, simply because the denominator, the E, is kind of catching back up. And that’s an important distinction between now and 2000.

So I think we still have speculative excess, and we probably are still going to see some of these micro bubbles pop, but it doesn’t look like it’s the same kind of systemic problem that we saw back in ’99, 2000.

MIKE: Well, as always, Liz Ann, you’ve given us a lot to think about. Thanks so much for joining me today.

LIZ ANN: My pleasure, Mike. Always nice to be here.

MIKE: That’s Liz Ann Sonders, Schwab’s chief investment strategist. If you’re not following her on Twitter, you definitely should do so to see her frequent thoughts on the market and especially to receive her morning barrage of interesting charts each weekday. Give her a follow @LizAnnSonders.

Finally, in my Why It Matters segment, I take a look at something you may have missed and tell you why I think it’s important for investors.

You may have thought the 2020 election ended with the certification of President Biden’s victory in early January, or maybe you thought it ended with the two Senate runoff elections in Georgia that same week. Actually, however, it ended this past Monday.

On February 8, the last election of 2020 ended when New York State certified Republican Claudia Tenney as the winner of the election to represent the people of the 22nd District, a Congressional district that runs from Lake Ontario to the Pennsylvania border in the central part of the state. In the days following the November election, Tenney at one point held a lead of just 12 votes out of more than 316,000 cast. But there were disputed ballots, missing ballots that were found after the election, and a host of other issues, all of which ultimately ended up in court.

A judge declared Tenney the winner by 109 votes. With the victory, she regains the seat she held from 2017 to 2019.

And that completes the November election—all 435 seats in the House and all 100 in the Senate have now been certified.

But that doesn’t mean we have a full lineup in Congress. Earlier this week, we learned of the death of Congressman Ron Wright, a Republican from Texas, who had been fighting cancer and then was hospitalized with COVID-19. In December, Congressman-elect Luke Letlow, a Republican from Louisiana, died of COVID-19 before he could even take office.

There’s also been a resignation—longtime Congressman Cedric Richmond, a Democrat from Louisiana, resigned last month to take a job in the Biden White House. Two more members of Congress have been nominated to Cabinet positions—Marcia Fudge from Ohio as Secretary of Housing and Urban Development and Deb Haaland of New Mexico as Secretary of the Interior. Both will resign from Congress once they are confirmed.

All five of these seats will be filled by special elections in their states in the coming months. So in some ways, the election of 2020 just keeps on going and going and going.

Why does all this matter? Well, once Fudge and Haaland are confirmed and resign from Congress, there will be 219 Democrats and 211 Republicans until those special elections are held—that’s an incredibly narrow margin. And it means that House Speaker Nancy Pelosi will have a margin of just four votes on key issues before the House. Because if five Democrats decide to vote against something, and they join all the Republicans in that “no” vote, that would be enough to defeat a Pelosi priority. The math of the situation potentially gives power to progressives in the House who feel that the party isn’t going far enough on the stimulus bill or other legislation. But it also could give leverage to the moderates in the party who worry that the party is going too far. Just a few lawmakers could band together to try to push the party’s position in one direction or the other, knowing that just a handful of votes could make the difference on whether something passes the House. It’s going to be a difficult line for House leaders to straddle.

I’ve said before that this is worth keeping an eye on in the weeks and months ahead. Nancy Pelosi is legendary for keeping Democrats together in the House. But she’s never had this little wiggle room.

Well that’s all for this week’s episode of WashingtonWise Investor. I’ll be back in two weeks, so please take a moment now to subscribe so you don’t miss an episode. And if you like what you’ve heard, leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews help new listeners discover the show.

For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.

I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.

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