Midterms and Markets: An Early Look Ahead

Jeffrey Buchbinder (00:00):

<Silence> Hello everyone, and welcome to LPL Market Signals. Jeff Buchbinder here, your host. For this week, I am pleased to be joined by a special guest, Mary Kate Clement from our government relations team to talk about the midterm elections. It might seem a little bit early but our Midyear Outlook is coming out shortly, first week of July. And Mary Kate, you are a co-author of that report. How are you? Thanks for joining.

May Kate Clement (00:31):

I am doing well. Thank you so much for having me, Jeff. Always love working with the research team on the midyear outlook. So should be a good, a good Midyear 2026 Outlook for folks.

Jeffrey Buchbinder (00:42):

Yes. It's not too early to preview that. It's maybe too early to have a high conviction take on midterms <laugh>, but nonetheless as we move into the second half of the year, we think it's an important item on the market checklist to look at because as we put in the Outlook for the full year midterms are a source of stock market volatility. So certainly interested in your take on that, Mary Kate. But why don't we just start with high level. What are your expectations for the midterms? I mean, certainly the consensus view is that the Republicans will lose the house, but the Senate seems to be kind of a coin flip at this point. What do you think?

May Kate Clement (01:26):

Yeah, absolutely. It's a great question. I think it's always important at the beginning of this answer to state that it's June 16th. Anything could happen between now and November. This has already been a rather volatile midterm cycle. It's been intense. There's been a lot of twists and turns between Congress and the White House. And I think, you know, given some of the news that was coming out of the White House maybe 48 hours ago, I think we're going to have a couple more twists and turns before we finally make it to election day. But anything could happen. And, this in mid-decade redistricting has also contributed to the sort of shift in how complicated this midterm election will be. Right now it looks like we're heading into a time of split government, regardless of whether Dems flip both or one chamber of Congress.

May Kate Clement (02:20):

I think you're correct. Right now, the house has a bit of an edge, but seeing some of these Senate primaries ramp up, I think you're also correct, the Senate is absolutely in play. Regardless though of the outcome and who controls the chambers, we do know that the margins are going to be small. So we are going to be, or I guess you could say, continue to be in a time of somewhat legislative gridlock. So it's going to be very difficult to move massive legislative packages catering towards one party or the other, regardless of who is in control of Congress. So I think we're going to continue to see some of this legislative gridlock that we've currently experienced over the past couple of years.

Jeffrey Buchbinder (03:05):

Yeah, I know historically the incumbent party tends to lose about 30 seats on average maybe a little bit more than that. And so that certainly feeds consensus. But what else is really sort of top of mind do you think, for voters? Is it affordability still that obviously was a big factor? Is it more foreign policy? What do you think are going to be maybe the key issues that swing voters one way or the other?

May Kate Clement (03:34):

Yeah, I think affordability is what voters are dealing with high cost of gas, groceries, overall cost of living, housing. You know, I think those are the issues that really drive voter behavior at the ballot box. And I think, you know, we're going to see that play out. I know folks are constantly asking, you know, how does redistricting play into this? You know, I think while it plays a role, obviously affordability is going to be, continue to be front and center this year with the midterms. This cycle is definitely going to be much more about real world economic sentiment closer to election day. And so I think, you know, where redistricting could matter is how big the margins are. I think we can all agree those margins are going to continue to be small, but this is really an election around cost of living. Geopolitical could play a little bit of a role. As we get closer, we'll see how the recent news around a potential Iran deal shakes out. But right now it is absolutely about affordability and cost of living for the average American.

Jeffrey Buchbinder (04:43):

Yeah, I think that's fair. I guess the next question I would ask is just how volatile do you think stocks might be? Because, you know, the way I think about this is, and we know historically markets are volatile ahead of midterms, right? The average drawdown is bigger than it is in any other year historically, but this year if the market prices in gridlock and we're not looking at major tax policy changes, do you think that actually could mean that this could be a calm late summer, early fall?

May Kate Clement (05:21):

Potentially <laugh>, again, we're June 16th, so who knows what exactly is in store and the events that we don't even know are going to happen between now and the fall. But I think, I think you are correct. I think markets have adjusted to oversight and gridlock. They factored that in. So, you know, I think when you think about what could really impact the markets leading into the fall, you know, maybe see a little bit of a blip around the elections, that's normal. I don't think it will be significant. So I think that, and to your point, you know, I don't think we're going to see a massive tax package between now and election day. So where you might see market movement is what's coming out of the White House and the agencies, the SEC. And then I think the other piece that's really important to always mention is keep an eye on trade.

May Kate Clement (06:16):

Trade is here to stay. We're seeing a lot moving with section 301. They're speeding that up with their investigations. July 24th is that key date for folks to, to watch out for. And then there's Al always USMCA, right? We're <laugh>, we're going into USMCA reauthorization. July 1st is a big day for that. It sounds like, you know, it's going to take longer than July 1st. So I think USMCA is going to continue into the fall, potentially even into the beginning of 2027. I think ishoring and nearshoring is in everyone's best interest. But there are some kinks, especially when it comes to China, that they are going to need to renegotiate and fix. So I would definitely say in terms of market impact, keeping an eye on the White House, the SEC, various different agencies and then, you know, trade and USMCA.

Jeffrey Buchbinder (07:18):

Yeah, certainly it's been helpful maybe to not have to worry so much about tariffs for markets. We know the market's really been driven more by the AI story than anything else. But the tariff situation is really not all that different high level. We just, of course, as you know, Mary Kate, we had to change the legal justification for it, right? And so that has delayed the tariff implementation. They came off, we've got refunds coming through now they're going back on. We'll still end up being maybe in the 10% range, maybe high single digits for an overall tariff rate. But the market was ready for that long ago. So we wouldn't really put that at the top of LPL Researches worry list for the for the second half. So Mary Kate, you talked about regulation a little bit or hinted at it a little, a little bit, I guess. So let's move into some more policy and specifically, what do you think could be market moving? So, you know, just one example is bank regulation, right? Clearly, if banks can hold more or hold less capital, do more lending, you know, that can have an effect on their earnings power. Are there maybe comments on bank regulation. Are there any other sort of regulatory moves that you think we could see from the Trump administration in the second half? That that could potentially be market moving or at least move some industries?

May Kate Clement (08:52):

Yeah, absolutely. I think your prediction markets is one that is picking up increased scrutiny both on Capitol Hill and a little bit from the administration. Not so much the White House, but some of the agencies. And so I think, you know prediction market regulation could intensify through the second half of the year. I also think too, either the admin is working on crypto market structure. You were seeing movement on Capitol Hill around the Clarity Act its path is still a little unclear, but we also know that the agencies, the CFTC, the SEC are working on regulation as well. So I think you're going to see a lot of movement in crypto, both in the second half of the year, but also into 2027. And then you nailed it on the head, Jeff, when you said AI.

May Kate Clement (09:43):

This is also an issue that is picking up steam. There is emerging legislation around a national AI framework. I think this is something that we're not going to see this Congress do. They're just starting too late on it, but it's something that could easily carry on into 2027 and the next 120th Congress. I think the margins are and who controls it are going to dictate what this could look like. But I think you are absolutely going to see movement in both AI, crypto, and prediction markets outside of sort of what you've already alluded to with bank regulations.

Jeffrey Buchbinder (10:24):

How about government shutdowns? Do you see more of that coming and could that be a source of market volatility?

May Kate Clement (10:31):

Probably, potentially either the first, we've kind of got two government shutdown hurdles before the end of the year. One of them is September 30th. It is right before a midterm. It is in no one's best interest to go through a government shutdown. So I think we'll continue to see that standard CR that kicks the can, continuing resolution for those who don't know what CR means, that kicks the can down the road closer to December and the holidays. But that's where I do think, depending on what we see in terms of election results, I think December could potentially be more of a challenge if we could go into a, some sort of government shutdown at the end of the year. So I think, again, I do think the markets have also adjusted to government shutdowns, have factored them in, because this year has definitely been an interesting year when it comes to government funding. I think we're pretty much in the clear in September, but I think December could definitely get sticky, especially in a lame duck term of this Congress where we could see a potential government shutdown.

Jeffrey Buchbinder (11:41):

Yeah. This market, particularly retail, is trained to buy the dip anyway. Yeah. So the government shutdown dip, I think the retail was trained to buy government shutdown dips <laugh> well before the pandemic. So we would certainly advocate for that in general, all else by the shutdown dips, because they don't really affect markets. Even the longest one we've ever had. You probably know the number of days, Mary Kate, I think it was in the mid forties maybe. Even the longest one we had was was not really a market event. It's just, it's a sign of, well, I guess it's a sign of gridlock, <laugh>, right? <Laugh> And it's just the partisan extremes in Washington, right? If you have more of that, the market's already factored that in. Once you get to the government shut down, there's really not a lot of new news in that, and they always get resolved.

Jeffrey Buchbinder (12:35):

So yeah, I wouldn't put that on our list of risks necessarily to worry about for the second half either. But certainly we, we could get one, as you just alluded to you also alluded to the lame duck session. So I know we talked about this getting ready for the call, that there could potentially, I'm going to kind of hold onto my chair when I say this could potentially be bipartisan agreement <laugh> on a tax package. What could potentially get done on taxes in a lame duck?

May Kate Clement (13:12):

Great, great question. I, you know, again, we'll see exactly what I think the midterms are really going to dictate the bipartisan appetite. Historically in the lame duck, you see some sort of bipartisan taxed extenders package, but this is also a bit of a different Congress. So we will see, I will definitely say there are some bipartisan, there are some, there is bipartisan tax legislation on Capitol Hill. I think one of them, a perfect example to give folks, one is one that we were actually on Capitol Hill yesterday with a number of LPL advisors and Mark Cohen, our Chief Growth Officer meeting with members on both the House and the Senate on what's called the Growth Act, which basically would put mutual funds on an equal playing field with stocks and ETFs when it comes to tax treatments. So with mutual funds, this would allow the investor to defer their capital gains taxes until they sell the mutual fund, as opposed to having that surprise tax built annually that comes with it.

May Kate Clement (14:19):

It is very bipartisan. It has 107 co-sponsors in the House of Representatives, which is pretty unheard of, and to, you know, in these partisan times. And we just had a companion bill introduced in the Senate. And so that is something that could be a candidate for some sort of bipartisan tax package if one comes together. If it doesn't come together, you know, this Congress, I think there's definitely going to be an appetite to do something in the next. And this is a perfect example of some sort of bipartisan legislation that you could see agreement on in either a split government or a time where you have, you know, a Republican administration, potentially two democratic chambers. This could be something that could go into a package that would receive the president's approval and not get vetoed. And so this is a new priority for LPL. Again, we were up there lobbying on it yesterday, but I think it's a perfect example of something that could actually pass despite the partisan politics in Washington that really would help, you know, the middle income average American investor.

Jeffrey Buchbinder (15:27):

Yeah, your job is really more than just helping research understand what's going on in Washington. It's also to actually lobby policymakers in Washington to help improve the frankly, the lives and the business for financial advisors. So thanks for doing the great work that you do. You, and the whole team over there just do outstanding work and I hope to join you on one of those fly-ins.

May Kate Clement (15:56):

We would love it, we would love to have research there. You know, it's an honor for us to represent LPL in Capitol Hill. You know, it's been a great company to take up there from a bipartisan standpoint. Folks really love to hear, you know, what our advisors are working on with their clients. And, you know, I think the advisors come with such a unique perspective because they have a better read from constituents on what is actually impacting them. Because, you know, our advisors, I say this on Capitol Hill, but yes, you are a financial advisor, but you also serve sometimes as a therapist to your clients. And so, you know, these members of Congress, you know, they, it's helpful for them to hear, you know, what you are hearing from your clients because that will help them better serve their districts.

Jeffrey Buchbinder (16:42):

We are more main street than Wall Street <laugh>, no doubt. So that's awesome. So I guess one other policy possibility that you had mentioned Mary Kate was the 529 plans. Yes. I thought this one was really interesting. It makes a lot of sense. I mean, I guess again, in this polarized political environment, something has to really make a lot of sense to get to get done. But this is one that I thought was really interesting.

May Kate Clement (17:13):

Yeah. And, this is coming up more and more, I think, you know there's folks that are starting to move legislation. I, again, I think this is something that doesn't get done. This congress, this is a next Congress potentially. I know the admin is also, the administration is maybe interested in doing around it, doing something around this. But the initial thought is how can folks expand 529 plans to be used to make a down payment on a home, which you also seeing things like Trump accounts emerge, they're in the process of getting set up and are getting launched and this would help put 529 plans at the same, you know, on the same playing field as Trump accounts as well. You know, it is something that folks are absolutely looking at.

May Kate Clement (18:04):

It plays into the affordability piece. I think this also could be very helpful when it comes to this, you know, major generational wealth transfer that we're going to see. But again, we are still in the early stages of this legislation. We've met with, committee staff on Ways and Means, which is the committee of jurisdiction in Congress. We've met with the Senate Finance Committee. We're in the process of meeting with the White House on this as well, just to kind of get a sense on exactly where they are in terms of how they want to move this. I think there's a lot of questions that still need to be ironed out in terms of how much money can be used for a down payment. You know, how quickly they need to purchase the home as soon as they withdraw the money from the accounts. There's a lot of nitty gritty details that they still need to work through. But I think this is something that is definitely beginning to you know, get attention on Capitol Hill and pick up steam. But I think, you know, we're in the early stages and sometimes it takes a while for these things to move, but it's, it's definitely something that, you know, could move if not this Congress, potentially next Congress.

Jeffrey Buchbinder (19:17):

I really like that idea. In fact, that's something I could potentially use myself. <Laugh>

May Kate Clement (19:26):

You got time <laugh>

Jeffrey Buchbinder (19:27):

We're not buying a first time home for her anytime soon, <laugh>. But I really, I really love that and it's sort of inspiring amidst all the talk about just how dysfunctional Congress is. It's great to hear about some bipartisan proposals coming through that make sense. So yeah.

May Kate Clement (19:46):

It's not the thing that you see on, you know, Fox News and CNN and, and MSnow, but there is some good bipartisan work being done on Capitol Hill. It's just not what's necessarily covered on the news every single day. But it is important work.

Jeffrey Buchbinder (20:04):

Amen. Amen. So, great stuff, Mary Kate. I'm going to give sort of my final thought here, and then I'll go over you for your final thought. When I think about midterms, first thing that comes to mind is in terms of the markets is there's this really powerful pattern where stocks sell off into the election and then rally sharply after it. In fact, the 12 months after midterms have seen gains in the S&P 500 every midterm cycle since the 1950s. So the returns are quite strong. So, I was talking a little bit about buying the dip, right? People are trained to buy the dip now. They buy the dip on government shutdowns. I mean, lately they've been buying the dip on just about anything. We're pretty much at all time highs. That is a really nice dip to buy if we get one.

Jeffrey Buchbinder (20:59):

So watch closely to see if we get midterm related volatility, maybe in September, October. We of course, don't know what the macro environment's going to look like, but macro environment aside midterms are definitely a dip to consider buying. So even though we think there'll be less volatility maybe than the average midterm year, just because of what's at stake, given the consensus is kind of firmly in gridlock with, with the house flipping, you're probably not going to get a near bear market. But that does happen a fair amount with, with midterm uncertainty. So that's my final thought. Mary Kate, your final thoughts?

May Kate Clement (21:45):

No, I think that's completely correct, Jeff. I think, at this point, the fall hopefully is going to be pretty quiet. And, and looking, if we are, you know, in a time of split government after the midterms, I would definitely say, to your point, it's not going to be Congress that is going to create blips in the market. It's probably going to come from the administration and the agencies. And so that should, where is, you know, where folks should be, you know, paying attention if they're looking at what can, what could really impact the markets. Obviously, again, it's June 16th <laugh>, anything could change in an election year. But, but I think your, your assessment is completely correct.

Jeffrey Buchbinder (22:22):

Yeah, the Trump administration has not been shy with executive orders or regulatory changes, so certainly don't expect that to change. But the potential for those things to move the market, it's just a little bit less than you know, the major legislation like trillion dollar stimulus packages or tax cuts, things like that, right? That really move markets because they affect corporate earnings. So we'll still get waves, we'll still get ups and downs in the markets as we always do but hopefully less dramatic than we have seen in some other midterm cycles. So with that, let's go ahead and wrap. Thanks so much Mary Kate for doing this. Really interesting to hear your perspective <laugh>. And so we learn a lot from you and greatly appreciate the work that that you do as part of the LPL government relations team. And I'd love to bring you back because you know, it's mid-June as we said, but at some point it's going to be September, October and that is going to mean that the election talk will heat up. So hopefully you'll come back and join us then.

May Kate Clement (23:37):

Absolutely. Thank you so much for having me. Jeff. Would love to come back pre or postmortem on the election and what lame duck really could look like, happy to do that anytime. Thank you so much for having me.

Jeffrey Buchbinder (23:48):

Wonderful. But first Midyear Outlook coming soon, I think July 7th is the date. So thanks everybody for listening to another edition of LPL Market Signals. Greatly appreciate it. We'll be back with you next time. See you then.