Dear John

Chief Economist, John Norris, answers the most commonly asked questions.

Dear John,

What kind of impact do you think the midterm elections will have on the US economy and markets?

John NorrisI have long maintained politicians get too much blame for the bad times and too much credit for the good. The upcoming elections will NOT change that conviction.

Discussing politics is always a slippery slope, but I have run what you could only call ‘Monte Carlo simulations’ in my head and keep coming back to the same conclusion: we are probably in store for 2 years of gridlock or stalemate in Washington, probably.

The Democrats can win both Houses of the Congress, but it won’t have the votes to override a Presidential veto. That requires a two-thirds vote in each chamber. Further, it requires a two-thirds vote of those present in Senate to remove the President from office. Basically, the Democrats won’t have the votes if the Republicans stick together.

Why? Well, the numbers aren’t there in the Senate. To be sure, the Democrats can win a majority there, but the GOP will still control 42 seats even if it loses ALL of its open seats. No one is predicting that will happen, and a simple glance at a map suggests it won’t. As such, unless a lot of Republicans break ranks, the Democrats won’t have the votes to have a two-thirds vote in the Senate. A two-thirds in the House? Brother, the Democrats would have to pick up 94 seats. While nothing is impossible, that would really be something.

So, unless something beyond the pale happens, we will have gridlock in Washington for the next 2 years if the Democrats have a great night on November 6th. But what if the Republicans retain control over both the Houses? While few are calling for that, stranger things have happened.

IF the GOP were to pull that off, one would assume it would try to pass some more tax and regulatory reform. Hopefully, it would address the capital gains tax and AMT in the upcoming rounds. If so, you know, we could have another buff or two of tailwind in our sails, which wouldn’t be a bad thing.

In the end, the probable case scenario is these elections won’t have a negative impact on the economy no matter what happens. Unfortunately, regardless of the election, the Federal Reserve is the one holding the cards.