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Tuesday midterm elections comes at a time of economic vulnerability for the United States. Recession predictions have largely shifted to “when” rather than “if” and inflation continues to soar. Americans are feeling the pain of rising interest rates and are facing a winter of geopolitical tension.
Tuesday’s election results will determine the structure of a congressional body that has the potential to enact policies that will fundamentally change the fiscal landscape.
Here are the policy issues that investors will pay particular attention to as they announce the election results.
Tax changes: Last week, President Joe Biden suggested he could impose a winning tax on major Oil companies after they posted record profits due to high gas prices. Republicans will be less likely to approve that wind tax on oil company profits and generally not in favor of raising taxes on the rich, reported my colleague Paul R. La Monica.
“What do midterms mean for the market? David Wagner, a portfolio manager with Aptus Capital Advisors, said if Republicans capture the House, tax increases will die in the country.
What about tax cuts? If Republicans take control of Congress, it will be difficult to enact any major tax cuts without backing from Democrats or President Biden, meaning there could be a major impact. without much action.
Debt limit: The federal debt ceiling was last lifted in December 2021 and is likely to be hit by the Treasury Department at some point next year. That means it will need to be enhanced again to ensure that the United States can borrow the money it needs to run its government and ensure the smooth functioning of the U.S. Treasury market, totaling about 24 trillion dollars.
A war seems to be brewing between Democrats and Republicans. House Republicans indicated they could demand drastic spending cuts in in exchange for a ceiling increase.
If the government ends the split and tensions continue, there could be bad news for the market. The last time such a deadlock happened, under the Obama administration in 2011, the United States lost perfect AAA credit rating from Standard & Poor’s and the stock fell more than 5%.
Spending: Democrats have indicated they intend to focus on parts of the fiscal agenda proposed by President Biden in 2021 that have yet to become law, including expanding health insurance coverage and childcare tax credits. A Republican victory or stalemate could solve that. Goldman Sachs economists also note that a Democratic victory could increase federal fiscal response in the event of a recession, while Republicans would be more likely to avoid costly bailouts.
Social Security: Popular programs like Social Security and Medicare face long-term solvency issues, and the topic has become a hot-button issue on both sides of the aisle. The topic is so closely watched, analysts say, that even debating the changes could affect consumer confidence.
Democratic Senator Joe Manchin said last week that spending changes were needed to boost Social Security and other programs he said “would go bust”. He said at a Fortune CEO Conference that he supports bipartisan legislation over the next two years to confront benefits programs facing “huge problems.” Republican Senator Rick Scott has proposed submitting most of the federal spending programs under a vote to renew every five years. That could make Social Security and Medicare more vulnerable to cuts, analysts say.
Federal Reserve: Lawmakers increasingly voiced opposition to Federal Reserve rate hikes to fight inflation. Democratic Senators Elizabeth Warren, along with Bank President Sherrod Brown, John Hickenlooper and others have called on Fed Chair Jerome Powell to slow the pace of growth.
Now, Republicans are getting in. Senator Pat Toomey, the top Republican on the Banking Committee, last week asked Powell to resist buying government debt if market conditions remained volatile. Expect closer scrutiny from both sides after the election.
The stock market under President Biden started to boom, but as we head into the midterms, the market will crash, reported my colleague Matt Egan.
As of Monday, the S&P 500 is down 1.2% since Biden took office in January 2021. That marks the second-worst performance in the president’s first 656 days in office since the former president. Jimmy Carter, according to CFRA Research.
Of the 13 presidents since 1953, Biden ranks 9th in stock market performance to date while in office, trailing only former Presidents George W. Bush (-32.8%), Carter ( -8.9%), Richard Nixon (-17.2%) ) and John F. Kennedy (-2.1%), according to CFRA.
By contrast, Biden’s two immediate predecessors entered the first midterm elections with the stock market soaring. According to the CFRA, the S&P 500 has gained 52.2% in the first 656 days in office for former President Barack Obama and 23.9% under former President Donald Trump.
US consumers borrowed $25 billion more in September, according to newly released Federal Reserve data, as higher costs lead to greater reliance on credit cards and other loans. reported my colleague Alicia Wallace.
In normal economic times, that would be a worrying leap, Matthew Schulz, chief credit analyst at LendingTree, wrote in a tweet. “However, it is actually the second smallest increase over the past year.” Economists predict monthly growth of $30 billion, according to Refinitiv consensus estimates.
The data, unadjusted for inflation, is at a decade high and weighs heavily on Americans, outpacing wage growth and forcing consumers to rely more on credit cards and their savings.
In the second quarter of this year, credit card balances increased the most compared to the same period last year in more than two decades, according to separate data from the New York Federal Reserve. The third quarter household debt and credit report will be released on November 15.
Correction: An earlier version of this article incorrectly stated the number of calendar days in the analysis as well as the stock market performance under many US presidents during that period.
