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Democrats swept into the majority in the House of Representatives on Tuesday, while Republicans increased their margin in the Senate. The outcome was in line with pre-election expectations and the overnight market reaction was muted.
With more than a dozen races still to be called, Democrats appear to have secured a margin of 10-15 seats in the House, regaining the majority for the first time since 2011. Republicans expanded their majority in the Senate from 51-49 to as much as 55-45, pending final results from close races in Arizona, Florida and Montana, as well as a runoff election in Mississippi on Nov. 27. (Those tallies include two independents who caucus with the Democrats.)
Democrats also appeared to have gained at least a half-dozen governorships across the country, though Republicans still control the majority of governor’s mansions.
The results mean a divided Congress will assemble in Washington in January—a situation that is likely to produce legislative gridlock. While Democrats will have the ability to pass bills through the House, many are likely to be rejected by a Republican-controlled Senate. The two parties will need to find areas of bipartisan consensus in order to legislate, but they have struggled to find common ground recently.
But the change in House control could mean more headaches for President Donald Trump. Democrats undoubtedly will use their newly won House committee chairmanships to investigate the president and his administration. The majority party has subpoena power that it can use to compel administration officials to provide documents and respond to questions.
The new Congress, of course, won’t be sworn in until January. In the interim, the current Congress returns to Washington next week to finish its business for the year. Among the key agenda items in the next few weeks:
- Looming partial government shutdown. The top issue facing this Congress—and potentially the most complex—is the looming risk of a partial shutdown of the federal government. Congress has funded about 70% of federal spending slated for fiscal year 2019, which began on Oct. 1. The remainder is up in the air: The two parties reached a deal in late September to temporarily fund the rest of the government only through Dec. 7. If Congress cannot agree to a spending plan by then, unfunded parts of the government will shut down.
One potential wrinkle is that Trump is pressing Congress to fully fund his proposed southern border wall by then. Funding the wall was already a politically divisive issue, and the coming change in the House will likely only deepen the divide. Democrats may not be inclined to work with Republicans on the budget or any other issues during the post-election session of Congress.
- Federal Reserve seat nomination. The Senate is scheduled next week to consider the nomination of Michelle Bowman, currently the Kansas Bank Commissioner, to fill one of three open seats on the Federal Reserve (Fed) Board of Governors. Bowman would fill a seat reserved for a community banker. If she is confirmed, she is likely to take her seat prior to the December meeting of the Fed’s Open Markets Committee, which will be considering whether to raise the Fed’s benchmark interest rate.
- China trade talks. A key issue for the markets is whether there might be an opportunity to ease the trade tensions between China and the United States now that the midterm election is behind us. Trump is planning a face-to-face meeting with Chinese President Xi Jinping at the end of November when the two leaders are in Buenos Aires for the G20 summit. If negotiations get a jolt, that would likely be a positive for the markets.
- House Leadership Elections. House Republicans are expected to vote on their new leaders as soon as next week. With House Speaker Paul Ryan (R-WI) retiring, Rep. Kevin McCarthy (R-CA) is seeking the top Republican post, which will be minority leader in the next Congress. But McCarthy is already facing a challenge from Rep. Jim Jordan (R-OH), and others could also be tempted to join the race.
House Democrats will also be electing leaders, though they may delay their votes until December. Rep. Nancy Pelosi (D-CA), who served as speaker the last time Democrats had the majority, is likely to return to that post. That said, some of the newly elected Democrats indicated during the campaign that they would prefer a new face as the party’s leader. So far, an alternative leader has not emerged. But Pelosi will need to navigate a diverse caucus to secure her leadership post.
Looking further ahead
One issue investors need to have on their radar screens for 2019 is the debt ceiling, which has been suspended for all of this year. The cap returns on March 1—starting the countdown on a potential default on the country’s debt.
The Treasury Department can take steps to defer default for several months. But Congress will need to either raise or suspend the debt ceiling by summer 2019.
Doing so is one of the trickiest political issues lawmakers face, one that will be even more difficult in a divided Congress. Uncertainty around when Congress will act has produced market volatility in the past. As the new Congress takes office next year, investors should keep an eye on the progress lawmakers make on this important issue.
In the short-term, though, we don’t expect a significant market reaction to the election outcome. As noted, the markets appear to have been anticipating a split decision for weeks. Other issues, including trade and the Federal Reserve’s monetary policy, are likely to have a greater effect on the markets in the weeks ahead.
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