Midterm elections will have ‘minimal impact’ on markets: Strategist

Yahoo Finance Video
1

John Hancock Investment Management Co-Chief Investment Strategist Emily Roland and Yahoo Finance's Rick Newman join the Live show to discuss the midterm elections, how politics will impact markets, inflation, and the outlook for the economy.

Video Transcript

[AUDIO LOGO]

- But we begin today with our top story, and that, of course, is the election. Much is at stake here for investors in the country on Election Day, with a handful of Senate races in key states. Let's dive right into it, as we're joined now by Emily Roland, the cochief investment strategist at John Hancock Investment Management, as well as Yahoo Finance Senior Columnist Rick Newman, both joining us here on set today. We've got a lot to tee up. And as we were even discussing before the show started, what are we going to know by the end of the night, if anything, at this point in time?

RICK NEWMAN: We will probably know who's going to control the House of Representatives next year or for the next two years. That's probably going to be the Republicans. Even if all the contests-- we don't know the final votes in all the contests. We'll probably know enough to know that Republicans took back control. If we don't know that, I would say that turns into a good night for Democrats. That means they would be overperforming.

We may not know who's going to have control of the Senate for a few days. There will be some late vote counting and possibly a runoff in Georgia, which is what happened in 2020. So it could come down to one or two seats in the Senate. And the takeaway for markets here is we probably are going to have divided government.

But the Senate does matter because of President Biden's ability to get appointees through. The Senate has to confirm a lot of senior political appointees. And if Republicans control it, it's going to be a lot harder. And it's going to change the nature of the point he's going to be able to get in.

- Emily, are investors too optimistic on the prospects of divided government and what it might mean to markets? We've seen the S&P 500 rise 5% in the past month. We're still dealing with inflation. We're still dealing with a slowing job market. And we're still dealing with the Federal Reserve not yet done raising rates.

EMILY ROLAND: Yeah, we actually think politics is going to have a somewhat minimal impact on the markets--

- Yay.

EMILY ROLAND: --going forward. I'm probably the--

- The voice of reason. Thank you.

EMILY ROLAND: I'm probably the worst guest to have on today because of my view on that. But, you know, you have seen some optimism, I think, baked into this rally we've seen over the last few weeks. And we are going to see this divided government with Republicans taking over more. So in Congress, you may see less fiscal spending, which I think makes the Fed's job a little bit easier here.

But, you know, you've got to think about some of these big challenges that we have. The economy is clearly decelerating right now. We're contending with inflation. I think the inflation data that we get on Thursday is probably much more important than the political backdrop right now. So we want to be careful about sort of overplaying politics and making cross-asset decisions right now.

RICK NEWMAN: I think another point there is divided government is going to do nothing for inflation. I mean, so inflation is the biggest thing right now because of the Fed's, you know, tightening.

And there's nothing about Republicans taking control of one or both houses of Congress that will affect inflation at all. I mean, Republicans are running obviously against the Biden record on the economy and inflation. But it's not like they're going to take control of one house of Congress and anything is going to change.

- Well, doesn't that argument--

RICK NEWMAN: It's going to be the same trajectory.

- --taking profits on stocks here, if we're not-- if we're going to get another hot CPI print, I mean, why are people buying into this result?

EMILY ROLAND: Yeah, I think it's interesting. It's sort of-- it's really hard right now to find a narrative around the markets, whether it's politics or whether it's the rumor around, you know, China reopening. It's like you think you're in high school again. Like, you're waking up in the morning, and markets are rallying off this rumor. And we're seeing riskier assets.

I think what's really notable about the cross-asset performance over the last few weeks is it's small-cap stocks, high-yield bonds, emerging market equities. China's up 15%. You know, so it's really notable that in this period where we're looking at the potential for a recession in 2023, these bounces are featuring very cyclical higher beta assets, which doesn't really square with our view.

- If you're a CEO watching the election results as they start to come in, you know, what goes through your mind, especially as you're thinking about the top issues among voters today? The economy, abortion, crime, all of those things that were the top three, at least according to Gallup, leading into this midterm election. But if you're a CEO, for the issues that are at the top of your docket, you know, what really comes to mind there? And where do you kind of hope everything nets out?

EMILY ROLAND: Yeah, I mean, CEOs are being challenged with a whole host of things outside of politics. And actually, right now, 98% of CEOs, according to the CEO Confidence Survey, believe a recession is coming next year. 98%.

So you're dealing with all sorts of challenges around input costs still being elevated, still supply chain issues. But then at the other hand, you've got companies that have too much inventory, so they've overstocked, you know, as a result of demand being pulled forward during the height of the pandemic. And then on the other side of the equation, you've got demand slowly. So we're-- slowing from consumers. So we're hearing that consumers are really not willing to absorb higher prices anymore.

So you've got this supply-demand mismatch kind of starting to go the other way. And so we're starting to hear things about layoffs. We're starting to hear more about hiring freezes. And right now, the labor market has been incredibly resilient. But I think that that's going to be a key challenge for CEOs is, where are costs going to be managed into next year? Is it less hiring? You know, is it less investment? So we want to find companies that are investing in being more productive.

RICK NEWMAN: CEOs, also, right beyond this election, have to be thinking-- they just have to be aware that the anti-ESG movement is picking up steam, and the campaign against so-called woke capitalism is picking up steam.

And I think CEOs just have to be watching. What's going on? Is this-- is this gaining more traction or less? Because this is going to come up in the 2024 election with Republicans bashing a lot of companies because they're too woke. So that's a tough-- that's a minefield for CEOs, and they have to think ahead of time about how are they going to deal with that when those accusations land against their companies.

- Rick, a lot of key issues on the ballot-- cannabis, betting, taxes. Is there one you want to single out here?

RICK NEWMAN: I mean, we've been saying this for the last three months. It's inflation. And if there's anything that's been surprising about voter attitudes in the home stretch, it's that it looked as if abortion and the overturn of the Roe v. Wade nationwide abortion protections were going to be potentially a decisive factor that would help Democrats here. And now it looks like not so much.

So then we get into the question of, let's say, Republicans look at that and say, oh, voters are fine with overturning Roe v. Wade everywhere. What's going to happen in the next election cycle? So this is going to continue. But that doesn't not seem to have been a decisive factor in this election. Well, you know, there's are all-- this is all according to polls, which have been wrong. So let's put that caveat out there.