Following months of debates, an endless barrage of television, radio, and online ads, and an estimated $5.2 billion in spending on congressional races (according to a projection from the Center for Responsive Politics), the midterm elections are over.
When the dust settled, Republicans had maintained control of the Senate, with 51 seats declared in their favor as of 2 a.m. ET on Nov. 7, according to The Associated Press. Meanwhile, Democrats reclaimed the House of Representatives for the first time in eight years. Although the seats are still being counted, The New York Times forecasts that 228 or 229 seats will head to the Democrats. As a refresher, 218 seats are needed for a majority in the House.
In plainer terms, America is waking up to a split Congress for the first time since the 113th Congress, which featured a Democratic-run Senate and Republican House between Jan. 3, 2013, and Jan. 3, 2015.
As investors, you’re probably wondering what this means for your money and the stock market. After all, President Trump has made economic growth a priority, and robust stock gains since the president took office have been at least partially credited to the passage of the Tax Cuts and Jobs Act in December 2017 and Republicans’ pro-business leanings.
So, what now? Let’s take a closer look.
Is political inaction a given?
Probably the biggest unknown is what we can expect from a fiscal policy perspective. Although not a lot of major legislation made its way through the 115th Congress, aside from the Tax Cuts and Jobs Act, a split Congress will almost assuredly make things tougher with regard to passing laws.
For instance, President Trump has suggested that he and his Republican allies in Congress were working on a second round of tax cuts that would be geared toward middle-class families. Unless the president can find a way to enact this legislation very quickly (i.e., in less than two months), there’s a good chance Democrats in the House will stymie any tax bill that would reduce federal revenue.
Republicans and Democrats are also likely to butt heads on healthcare and immigration — two topics that have been hotly contested for some time. In particular, Trump has been pushing for the repeal and replacement of the Affordable Care Act (also known as Obamacare) for more than two years. While Republicans have managed to weaken the law significantly, first by removing the cost-sharing reductions that provided financial assistance to lower-income individuals and families, and then by ending the financial penalties associated with not purchasing health insurance (effective in 2019), they’ve been unable to come up with an agreeable replacement. With Congress now split, advancing any healthcare bill appears impossible.
Another concern would be the increased possibility of a government shutdown. Since 1960, the federal government has voted to increase the debt ceiling — the amount of money the U.S. federal government is allowed to borrow — 78 times. In recent years, politicians have used the debt ceiling in a dangerous game of chicken to gain concessions from their opposing party. With a split Congress, there’s the possibility of a prolonged government shutdown if the Democratic House and Republican Senate can’t come to an agreement on raising the debt ceiling.
If there is one possible area of agreement here, it’s on infrastructure. Trump has long proposed boosting spending on infrastructure to stimulate the U.S. economy. Projects that would rebuild older U.S. bridges, roads, and airports would be appealing to Democrats as well. This in no way means that an infrastructure deal is going to get done, but it does suggest that this split Congress isn’t a lost cause for fiscal policy.
Near-term volatility should be expected
What’s that mean for the stock market exactly? A lot will really depend on how well the economy performs over the next two years.
On one hand, if U.S. GDP continues to come in at more than 3%, the unemployment rate remains near decade lows, and corporate earnings growth remains strong, then the stock market could react quite well in the intermediate term. The Tax Cuts and Jobs Act, with its reduced marginal peak income tax rate for corporations (21% now, compared with 35% previously), has certainly created an environment that’s conducive to improved profitability. This is probably one of a few reasons all three major indexes hit an all-time high this year.
On the other hand, President Trump can’t control what corporations choose to do with their windfall of extra cash. Many have chosen to repurchase their own stock rather than expand their businesses, hire new workers, or increase wages. This may produce a temporary pop to the stock market in the form of higher earnings per share for publicly traded companies, but it rarely provides the long-term impetus to drive organic sales growth that Wall Street and investors would be looking for. The verdict on the success or failure of the Tax Cuts and Jobs Act is still to be decided.
The most important thing investors should keep in mind
But what investors should really keep in mind is that no matter what had happened with the midterm elections, the stock market is in great shape over the long run.
Since 1950, the broad-based S&P 500 (SNPINDEX:^GSPC) has undergone 37 corrections during which it’s fallen at least 10% from its recent highs. Removing the current correction from the equation, a bull market rally has eventually erased all 36 of these previous corrections. Whether we’ve had a Republican in the White House or a Democrat, and regardless of whether Democrats or Republicans controlled Congress, or it was split, the stock market has always found a way to increase in value over the long term. All that’s needed is time and patience for investors to succeed, regardless of what politicians do from a fiscal policy perspective.
What’s more, it’s just as important to understand that, aside from being perfectly normal and healthy the market, stock market corrections are usually very short-term events. Of the 36 previous corrections in the S&P 500 since 1950, not counting our existing correction, 22 found their bottom in 104 or fewer days. In other words, the stock market spends far more time rallying than it does retracing its steps, and that’s a good thing no matter what party is making policy.
Two stocks to consider buying right now
With all that being said, here are a pair of stock ideas to consider right now that should treat you well over the long run, regardless of which party is in office.
For starters, payment processing giant Visa (NYSE:V) is a company that could thrive regardless of which party is in power. As of 2016, Visa controlled more than half of all network purchase volume in the United States, up from 42.5% in 2006. The company’s next closest competitor, American Express, sits almost 28 percentage points behind in U.S. market share. As long as the consumption-driven U.S. economy is motoring along with a GDP growth rate north of 3% and an unemployment rate at or below 4%, consumers are going to be enticed to reach for their plastic.
Visa also has the advantage of purely being a payment facilitator. Whereas some of its payment-processing peers lend as well, Visa does not. Though it can’t double-dip with net interest income when the economy is running on all cylinders, as it is now, this also means Visa is relatively impervious to rising credit delinquencies. That, and it has a large international presence, especially in Europe.
Visa is a smart choice to thrive in this post-election environment.
Within the healthcare sector, I believe Intuitive Surgical (NASDAQ:ISRG) will do exceptionally well, even if little to no progress is made on an Obamacare replacement. Intuitive Surgical is a maker of robotic-assisted surgical systems for hospitals.
Think about it this way: People get sick and need surgical procedures, regardless of what party is in office. That creates a steady stream of demand for Intuitive Surgical’s devices. But more importantly, surgeons and patients are finding increased value in the potentially faster healing times and preciseness associated with Intuitive Surgical’s da Vinci system. This gives the company plenty of opportunity to make inroads in soft-tissue surgeries, such as thoracic and colorectal procedures.
Intuitive Surgical also stands to benefit from its growing base of installed systems. Though these are pricy systems, usually ranging from $0.5 million to $2.5 million, it’s the need for new instruments and regular servicing that drives the company’s impressive margins. Put in another context, Intuitive Surgical’s operating margin should increase as more of its da Vinci systems are installed.
In sum, while we can probably expect some near-term market turbulence, there aren’t any investment thesis-altering reasons to jump ship. There’s strength in numbers, and those numbers suggest that investors be patient and think long term.