November 7, 2018. 5:00AM. Hallelujah, the elections, or more notably the television ads, are over. I think I can now go back to watching drug ads for either psoriasis or rheumatoid arthritis, and billboard lawyers who always win their cases. That’s what I get for watching Jeopardy.
Well the elections came out pretty much as predicted by the pollsters, which may be unusual, but the Democrats took control of the House and the Republicans maintained control of the Senate. The operative word of this is ‘Gridlock’. Simply stated, no one party can now get anything done without some form of compromise. In addition, President Trump holds a veto pen, and can veto any legislation he doesn’t like. It is very unlikely that a 2/3 majority could be reached to override a presidential veto, although, in today’s world, anything can happen.
So what might this mean?
- Further major tax reform seems very unlikely. It is possible that we may have technical corrections (to fix mistakes in the original bill). There’s a remote possibility that the corrections might include respite for some onerous provisions of the law (like the state and local tax deductions), but any new full tax change seems very remote. There are some good provisions in Tax 2.0 that affect retirement savings which have bipartisan support.
- Infrastructure. This seems to be a possibility, since both parties want infrastructure change. Not to put to put too fine a point on it, but any time you fix a bridge, highway, sewer or tunnel in your district, you create jobs in your district. Spending? No problem! Both sides seem immune to any budgetary constraints. By the way, this is the first time in history that the number of job openings has exceeded the number of unemployed people, so I wonder, who will work on the roads?
- Immigration. I suggest any change to immigration is DOA. The sides are too far apart.
- Inflation. Right now, inflation is tame. The Fed is actually below its inflation target of 2%. I can’t help but think that full employment, deficit spending, and possible infrastructure spending, should raise wages. Real wages have been remarkably stubborn on an increase, although they have been increasing. We’re watching for more signs of inflation.
- Fed. Despite what the president thinks, the Fed has a mission to protect the banking system against inflation and an economy that is too loose, and hence, overheated. The Fed will likely continue its policy, which could lead to a prospective recession.
- Recession. This is the second longest economic expansion since 1780. Just because it’s long doesn’t mean it’s deep. There is room for expansion to continue, but tariffs, an inverted yield curve, and the rate of inflation getting higher than the unemployment rate are all signs of a recession. How bad? Bad recessions tend to come off of excess bubbles, and we don’t see a looming bubble.
A note about Michigan:
- Gretchen Witmer is Michigan’s next governor. The Michigan House stayed (narrowly) Republican as did the Michigan Senate. This means we will have divided government, and the necessity for collaboration to get legislation passed. In the US Congress, potentially two seats in the House (Stevens and Slotkin) flipped to Democrat.
- Recreational Pot is now legal in Michigan. What was formerly a budding industry can now see some growth and can get quite high (sorry). Remember that Marijuana is still a federally illegal drug, and accordingly, no money can go into the federal banking system from pot sales. However, I am thinking about investing in Doritos and pizza.
- The new provision on anti-gerrymandering passed. Now redistricting will be set by a citizen commission.
- The provision on easing voting requirements won by a 2-1 majority, with voters now able to get no-reason absentee ballots and vote straight party tickets.
All in all, it was an important election. On the federal level, midterms tend to shift against the party in power. By the way, we looked at prior mid-terms: the average draw-down before a mid-term election was 17%. The average increase recovering from the draw-down one year later was 34%. Maybe it wasn’t so bad after all. On to annoying Christmas ads!
Leon LaBrecque, JD, CPA, CFP®, CFA
Managing Partner and CEO, LJPR Financial Advisors
5480 Corporate Dr., Suite 100 | Troy, MI 48098 Main: 248.641.7400 | Fax: 248.641.7405 Email: email@example.com