What the election may mean for investors

A split Congress may mean more focus on regulation and state leadership.

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In the 2018 midterm elections, voters went to the polls in strong numbers, delivering a majority of seats in the House to Democrats, while Republicans added to their majority in the Senate.

What could the new political landscape mean for investors? Viewpoints spoke with members of Fidelity’s Government Relations and Asset Allocation Research Team. Our experts saw the results as a sign that some policymakers may pull back on economic support and place more emphasis on regulatory change. It will likely be difficult to pass bipartisan legislation, which could lead to greater gridlock in Congress.

Narrow majorities may limit legislative action

Jim Febeo, Fidelity Government Relations

Divided control between the House and Senate significantly reduces the likelihood major legislation will be enacted. Despite the potential gridlock, investors will still need to pay attention to ongoing trade negotiations, the prospects for an infrastructure bill, and the impact of the Democrats’ anticipated use of their House majority for oversight and investigations.

I expect the regulatory agencies to continue actively pursuing a deregulatory agenda that circumvents the need for congressional action. I also anticipate proactive efforts in a number of states that will seek to counter that deregulatory effort, specifically in the areas of privacy regulation and fiduciary rules for investment advice.

I also expect to see additional turnover of key administration officials that could create some short-term uncertainty, but the increased Republican margin in the Senate should ease the confirmation process for replacements. In the financial services and investor spaces, the regulatory changes could include:

Retirement plans for small business: The Department of Labor has already proposed new rules aimed at allowing multiple employers to sponsor a single workplace retirement plan (open multiple employer plans or “MEP”), but adoption of bipartisan legislation is still necessary to make these plans attractive for small businesses. Congress could act on this before year-end.

Health care: Health reforms remain at the top of both Republican and Democratic policymaking agendas. While tensions over the Affordable Care Act (ACA) continue, issues such as lowering prescription drug costs and covering pre-existing conditions may become an opportunity for bipartisanship.

Data privacy: While Congress has not passed major data privacy rules, international bodies and states have paved the way for major changes in how consumer data is managed and protected. States may fill the gap by following the lead of the European Union and California, both of which enacted sweeping data privacy reforms this year.

Infrastructure: Policymakers continue to work through the challenges of paying for infrastructure changes, but a common interest in infrastructure improvements may put these efforts center stage as both sides look for achievements ahead of the 2020 presidential race.

Exchange-traded funds (ETFs): The Securities and Exchange Commission re-proposed a rule to standardize registration of ETFs to replace the current system of exemptive relief and bring parity to the industry. We expect the Commission to work towards finalizing the rule.

Looking ahead, Republicans and Democrats have their eyes on the 2020 presidential race. A number of Democrats have already expressed interest, and there could be some Republicans who seek to challenge President Trump in a primary.

We are continuing to assess the new landscape and will share updates with Viewpoints readers as more details on congressional leaders and agendas emerge.

US economic policies likely more mixed in 2019

Dirk Hofschire, Fidelity Global Asset Allocation Research Team

Favorable policy conditions have supported US companies during 2018, including tax cuts, fiscal stimulus, and a lighter regulatory stance. However, economic policy may provide less of a tailwind in 2019 with the boost from corporate tax cuts fading, the likely continuing interest rate hikes by the Federal Reserve, and the cumulative drag from higher tariffs and unsettled trade policy.

Given the size of the tax-law changes and the stimulus boost this year, it was already unlikely that Congress would legislate anything nearly as meaningful for the markets or the economy in 2019. The divided nature of the midterm election results makes significant legislative action even less likely next year.

Overall, it appears that global economic momentum has peaked, and the US economy is facing the onset of late cycle dynamics. While US recession risk remains low and corporate fundamentals solid, the maturing business cycle—in addition to trade and monetary policy risks—could lead to greater market volatility. Compared to the past few years, which were very favorable for risk assets such as stocks, this point in the business cycle might argue for smaller asset allocation tilts and greater diversification.

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