Market Conversations: What’s different about these U.S. midterms?

Brian Levitt:

Hi, I'm Brian Levitt.

Jodi Phillips:

And I'm Jodi Phillips. Today we're talking with Andy Blocker, Global Head of Public Policy, and our resident expert on all things happening in DC. And nothing's bigger right now than the upcoming midterm elections on November 8th.

Brian Levitt:

That's right, Jodi, the midterm elections. You know what David Letterman said about the midterm elections?

Jodi Phillips:

What did he say?

Brian Levitt:

He says, "It's the day that Americans leave work early and pretend to vote."

Jodi Phillips:

Okay. All right, well far be it for me to argue with Letterman, but there's a lot of speculation that we could break the modern day record for midterm turnout this year, last set in 2018 actually.

Brian Levitt:

What was that, like half the country? 50.1% or something I think voted in 2018.

Jodi Phillips:

Yeah, I didn't say it was an impressive record, but it's a record nonetheless. And for Democrats, there's an expectation that those high profile issues, the overturning of Roe v Wade, the January 6th committee hearings, could bring more Democrats to the polls this time.

Brian Levitt:

Yeah, that would be a bit of a push against what we've seen historically if the Democrats were to maintain. I think historically the midterms haven't been very good for the president's party, and we'll see. I mean, we'll see. Biden's approval rating had fallen pretty low but maybe coming back up a bit, so we'll see if this time is going to be different than what Obama experienced, what Clinton experienced, what Trump experienced.

Jodi Phillips:

We'll see. But Brian, before we get into that and before we bring Andy on, I do want to ask you a question about the historical trend for markets in the midterms. Is there a particular outcome that markets would clearly prefer?

Brian Levitt:

Yeah, it's a good question, Jodi. I mean if you look at the performance over the last 121 years, and that's as far back as we can go on the Dow, it shows a preference for divided government over single-party rule. That's a comment that I think is well-known in the industry. I've always heard that for as long as I've been in this industry that markets like divided government. It's kind of hard to even discern if that's a statistically significant statement. I'll give you an example. One of the potential outcomes from this election would be obviously a Democrat in the White House, a Democrat Senate, and a Republican House. Now, that's not a foregone conclusion, but it's a possibility. That has actually been the best for markets over the last 121 years. But you know what's funny about that, Jodi?

Jodi Phillips:

What's that?

Brian Levitt:

It's only happened in four years, so it only happened from 2011 through 2015.

Jodi Phillips:

Four out of 121, that's it?

Brian Levitt:

At least as I can tell. Maybe Andy will tell me I'm wrong on that, but I tried to go through the Wikipedia page and look at it.

Jodi Phillips:

Well, there you go.

Brian Levitt:

Yeah, so it doesn't seem that statistically significant, but maybe it's a similar environment where maybe we'll be coming out of a little recession like we were 2009, '10, into '11, and maybe it will be a good time for markets.

Jodi Phillips:

Well, let's hope, let's hope. So on that note, let's bring on Andy to get the scoop on which particular combination of government rule we might see after these midterms. And I also want to talk about some of the legislation that our current Congress has passed over the summer, the past few months, and what that could mean for investors and for taxpayers.

Brian Levitt:

Andy Blocker is back. Welcome.

Andy Blocker:

It's good to be with y'all. Thanks for inviting me back.

Brian Levitt:

And so Andy, let's just start with the bigger picture. What are you expecting to see in November?

Andy Blocker:

So, that's a great question because expectations are changing day by day. This is a different year than I think we've ever seen. I mean, conventional wisdom is, look, we are a rebellious lot. What I mean by that, our country, we started by rebelling against the Brits, and we really don't like any one group of people or party holding the levers of power for too long. So historically, we just throw the bums out or we recreate or at least put some other people in to hold it back.

Andy Blocker:

So whenever one party has all levels of power vis-a-vis the Presidency, the House, the Senate, we like to at least take one or both the House and Senate away from that power that holds the Presidency. And the numbers are pretty stark. So I think in the last 30 years, which is a tight window, but I think the average is like 47 seats in the House are lost by the party in power and four to five seats are lost in the Senate. So that's history, and I think a lot of that is true for this election cycle.

Brian Levitt:

That's what Obama called the shellacking, right? I think Obama in, was it 2010, had the worst outcome of any of those presidents over the last 30 years?

Andy Blocker:

That's right, and it was a shellacking partly, and look, I think each party in power has a little bit to blame because usually when they come in the office, they overreach. They focus on their agenda and aren't as bipartisan as they should be, but I think it's just our natural reflection and natural inclination to be like, "Okay, you had a couple years with all of it. I'm not certain I want to give you any more time." And all the facts is that the party out of power is more energized, much more energized because they're the ones feeling aggrieved.

Jodi Phillips:

So Andy, what do you think is energizing voters this time around? What is the latest polling telling us about what issues are most important to voters right now? And in particular, where would economic issues land on that list?

Andy Blocker:

Yeah, so that's the key question. What's going to motivate people to get out the polls? So I just gave you one, just the inclination to "Hey, get those guys out before they destroy our country." The second is, yeah, economic issues. My former colleague James Carville, he said, "It's the economy, stupid." And it holds true today. It's basically this is a tough time for both, if you look historically for Democrats in the midterm and if you look at the economic numbers. So inflation is much higher than you would want going into the election. It looked like it was waning, and then the last month's numbers didn't do that. And the question is, where is it coming into November? But the practical ones are like, "Forget the top line number, gas prices." I mean that's what impacts people's lives every day.

Andy Blocker:

There's a almost directly inversely proportional correlation between gas prices and Biden's approval rating. It's like as gas prices go up, these numbers go down. So that's a very motivating factor. It's like, "Hey, these guys are in office and look what's happened," whether it's totally their fault or not. We got Ukraine/Russia. You've got coming out of the pandemic. You've got all these factors, but it doesn't matter, you're in charge and my life isn't as good so I want somebody else.

Andy Blocker:

But I do think there's some interesting counter-veiling forces this cycle, which we haven't necessarily seen. We've seen one of them. So the first one is Donald J. Trump. The more that Donald J. Trump is in the news, the more it motivates the people who don't like him, and so that's something good for the Democrats. You name your investigation or whatever he's saying, it doesn't matter. He's front and centre in the news. I think net-net is going to motivate Democrats to get out more than it's going to motivate Republicans because he's not on the ballot. When he's on the ballot, he has record turnout. He did it in 2020. He helped Republicans actually gain seats in the House in a year when Biden won the presidency. But in 2018, he did a lot more damage to the Republican party. Not a record number, but a large number of seats taken away from the Republicans. They lost majority in the House. And so, I think that's a real element, but I think the one that's even bigger this year is abortion and Roe v Wade.

Brian Levitt:

Right, right. Well, I was just going to say Carville also said that he wants to come back in life as the bond market so he can intimidate everyone, and that was kind of to your point about inflation. I don't know, Jodi, if you ever heard that one. He's like, I don't want to be a rockstar. I don't want to be a-

Jodi Phillips:

No, that one's new to me.

Brian Levitt:

I don't want to be an All-Star baseball player. I want to come back as the bond market so I can intimidate everyone. And that's clearly been what's happening this year. The rate's up significantly, equity valuation's down, and that's all part of this inflation story Andy's talking about. So yeah, I do want to hear about Roe v Wade and abortion and what that's going to mean for the getting out of the vote.

Brian Levitt:

But I'm also curious, before we even get to that Andy, you were talking about gasoline prices and Biden's approval rating. Is there a cutoff point on approval rating that matters? Biden was in the low forties, I think. Has he come up from there as gas prices have come down a bit, and do you expect that to roll over in the next few weeks, given what OPEC has just done to cut oil production?

Andy Blocker:

No, I think that's right. So he has come up as it's continued to... He's in the what, mid-forties now? I think depending on what you use, if you use RealClearPolitics or if you use a particular poll. But no, it's still been in his favour and that's why this OPEC announcement is, I think, that's why the administration was not very happy with that because they know what it means. There's reports that, I think, Ron Klain admitted the first thing he looks at, the Chief of Staff for Biden, he looks at gas prices because he knows that's how it impacts people's lives. And for those who are more well off, it doesn't impact their lives as much. They might get annoyed, but for people who are on the lower end of the income spectrum and people who have to travel greater distances... In a lot of these metropolitan areas, you might not have to travel. You might have to travel 5, 10, 20 miles, but in the rural areas, you're traveling 40, 50 more miles.

Andy Blocker:

And so I do think it has a huge impact, and we'll see what the impact is. They say they're not going to reduce production until November, but I think it's already hit the markets. I mean I think the futures markets, it's already hit. And so, the question is how fast does it get down to the pump?

Jodi Phillips:

So to the point that you were making a little bit earlier about the Roe v Wade issue energizing voters potentially, are we seeing any signals to help support that idea? I mean when it comes to either voter registrations or anything else that might give us insight into what the turnout could look like.

Andy Blocker:

So we were very cautious on that. We knew it would have an impact, but we were kind of like well, seeing is believing, right?

Jodi Phillips:

Right.

Andy Blocker:

So we see a lot of news reports, we see a lot of things going out there. So the first signal that this was real, the first real signal, was the Kansas referendum on abortion. Kansas is a Republican state, a majority very conservative state. And so, when it came back 59% to 41% for the right to have an abortion, that was a pretty clear signal that this was going to be a big deal because it wasn't just Democrats coming out, but you needed Republicans and Independents and you saw that in Kansas.

Andy Blocker:

Then the next question was, okay, okay fine, it's going to be a big issue, but it can't have a one-to-one translation to, “If I'm anti-abortion, that means I'm going to all of a sudden vote for a Democrat.” And I don't think it does. But we did see another data point in the New York special election for congressional seat where the Democrat ran solely on this issue, ran solely on the issue of abortion rights and won the race. I think it was 51/49. It wasn't a big win, but it showed that this is a winning argument.

Andy Blocker:

But the bigger data point for me is that Republicans who have, up until this point, had (said) “I'm totally pro-life, no exceptions for the life of the mother, rape or incest.” All of a sudden their websites have been scrubbed, and they are no longer purporting that or at least advertising that loudly. And so, that's a sign to me that when you are moving how you're positioning yourself, that you recognize this is a threat to your candidacy.

Jodi Phillips:

So Andy, I want to talk a little bit too about the Congress that we already have and the summer that they had the past couple of months. I saw in your LinkedIn article recently, you called it an “outbreak of bipartisanship,” and it seemed like they were checking a lot of things off the list in terms of infrastructure and energy and veteran health care, manufacturing. What happened? What's behind all that?

Brian Levitt:

We finally had a good outbreak, Jodi.

Jodi Phillips:

Oh my goodness. Yeah, seriously. So what prompted that?

Andy Blocker:

My theme for the year has been this concept of politics, Trump's policy, and I think this goes right underneath that. So under that rubric, some people get upset when I say that. They're like, "No, that's not the way it should be. The best policy should win." Well no, I agree with you the best policies you should win, but since we're in a democratic republic, the voters have a say. And so, if you want your good policy to become real, you make a good politics. So that's the job there.

Andy Blocker:

So I think a lot of the things that you mentioned, a lot of the different areas that passed, look, voters wanted safer communities, they wanted better roads, they wanted modern manufacturing, they wanted U.S. competitiveness globally. So I think that allowed a lot of these things to come just as a baseline. They're generally popular. And then also, there are certain constituencies that were pushing for it. You need the right constituencies pushing for it, and you need the, how should I say, not just the macro polling to go your way, but you need the micro polling. You needed the key members in the different chambers, the House and Senate, who are going to be in favour of it. And a lot of these things, Senator Schumer, the majority leader and Senator Mitch McConnell, the minority leader, supported. And once you got that, that kind of paved the way, but they weren't just doing that in a vacuum. They were looking at the polls, and a lot of it was the pushback or the consequence of inactions in some of these areas outweighed the potential pushback against any action.

Brian Levitt:

If we get to the beginning of next year and the composition of the government is what many people believe it to be, which would be divided, let's just say for example, are there other things to tick off here where we're going to see more outbreaks of different strains of bipartisanship, Jodi? Or should we expect it to be more of a lame duck couple of years?

Andy Blocker:

Yeah, I think between those choices, I'll use the word lame duck, I think is the most likely scenario. And I say that because I think 2018 is more the model here. I mean in 2018 after their Democrats won back the House, they spent the next couple years the way they do. They impeached President Trump twice. I think this Republican House is going to definitely, if they're not successful, they're going to try to impeach President Biden. And you also saw the government shut down because there was divided government. It was Trump and the Democrats going at it last time. This time it would be Biden going at it with the new House Republicans, who are going to probably want to extract a lot of things from him, holding that over his head. And then you've also got late next year, you're going to have to deal with the debt ceiling. So I think it's going to be very, very, very contentious, I think, between impeachment, all the different investigations. They'll have subpoena power. So it's going to be pretty raucous.

Brian Levitt:

Is this the country now? We're just going to do rolling impeachments? I remember that chapter we learned in, what was it, 11th grade where I think we were going through the, I'll give up my age, the Clinton impeachment at the time. And then you had to learn about Nixon's resignation. I think before that you had to go all the way back to, I don't know, maybe Andrew Johnson or maybe I'm missing a couple. Is this just how it is now?

Andy Blocker:

I think at least coming up in this next year, it's going to be tit for tat. It's like, "You got my guy, I'm going to get your guy."

Brian Levitt:

As my grandmother would say, "Oy."

Andy Blocker:

You know what? It's not even about “I disagree with you.” It's “I don't like you” and “I don't like, you know ...”

Brian Levitt:

It's a shame. It's a shame.

Andy Blocker:

So it's not about we have a difference. No, you are the enemy within. And so look, that's why I think things like the Cold War, we had a common external enemy, and that mitigated a lot. Didn't mean we didn't have differences inside the country, but most of our energy and our ire was focused outside and we didn't have as much time inside. Now that we don't have as much time outside and who knows, I mean there's been some unity, vis-a-vis anti-Russia with Ukraine. There's growing unanimity vis-a-vis China. I think that's the one bipartisan thing we're going to see. I mean the CHIPS and Science Act doesn't come to pass unless 82% of the American people have an antagonist view of China. It just doesn't happen. And so, that was seen as a move to be more competitive with China, and I think there will may be opportunities even in the next Congress to do some things there. But that's the one area where there's kind of unanimity by pushing your animosity outside, but yeah, it's going to be a rough couple years.

Jodi Phillips:

So Andy, you mentioned that the CHIPS and Science Act to boost U.S. semiconductor competitiveness, production. What could that mean for manufacturing jobs here?

Andy Blocker:

Well, I mean we've already seen it. Intel was the first. They got out of the box quickly. They announced $20 billion investment for a couple factories in Ohio. You saw more recently Micron announcing a $100 billion investment in upstate New York, and IBM came in with another $20 billion investment announcement in upstate New York. So you've already seen it, and I think you're going to see a lot more of that because the incentives are really good. That's what the bill was meant to do was incentivize, bringing a lot of that manufacturing back to the U.S. because we saw during COVID that that put us at risk. It's the fact that some of the challenges of having global supply chains, they're fragile, and then on top of that, the fact that China's relationship with Taiwan and the threat of that semiconductor production not being able to get back to the U.S. when we're still relying on it. So I think you're going to continue to see more and more announcements out of that.

Brian Levitt:

And then the other big piece of legislation I think to talk about briefly is the Inflation Reduction Act. I love how they name these things. How much of this was really meant about reducing inflation in the near term? But that's certainly a catchy name for what's going on. So give us a sense of what that means for businesses, for taxpayers. What does it mean? Is it really a panacea with regards to the environment, and what perhaps may be flying under the radar with that bill?

Andy Blocker:

Yeah, no. Well first of all, so the three major parts are taxes, health-related provisions, and then the energy and environment that you just mentioned. I think politically the prescription drug part is really, really important. The question is whether or not people see that or pay attention to that before this election. But the fact that Medicare can negotiate on a lot of these prescription drugs and they've capped some of the payments for your prescription drugs going forward is a huge deal. But going back to the energy and environment, I think look, there's a bunch of tax credits and rebates to help lower energy costs, to strengthen supply chains of critical minerals, and to increase domestic production of clean energy. And I think this is the largest investment we've seen in those areas.

Andy Blocker:

And the one thing going forward, the supply chains for critical minerals and the increasing domestic production of clean energy, those are obviously important, but in the short term, it's interesting that to lower energy costs coming into this winter, that's a big deal. So no, I don't think anything's "under the radar." I think these are real things. This is bipartisan. Everyone's going to try to take credit for it, and I think they did a lot of good. I think the one thing, if I were going to say under the radar, is the long-term science investment because you don't see it right away. But we really need that as a country to be competitive long term because it's not just about having the best technology now. It's having the leading edge science now that can lead to the continuing of our supremacy in that technology arena, which I think is important.

Brian Levitt:

I keep hearing you use the word investment, and that's after the federal government spends $6 trillion to support the economy through the pandemic. And a lot of investors, a lot of people I speak with are very concerned about the type of money being spent. The national debt now over $31 trillion. What I've tried to talk about is these investments in the future don't all hit at once. This is not $4 trillion from the Trump administration, $2 trillion from the Biden administration. This is money over a longer period of time. So can you put that into some perspective?

Andy Blocker:

No, I think you hit right on it. I think first of all, it's the investment versus spending. So I think we were propping up the economy by giving people money, and the money was flowing out fast to keep the economy going. So even the $1.9, $2 trillion you talked about from the Biden administration early in their tenure, I mean a trillion dollars went out in six months. So that is inflationary. Sorry, we're seeing the effects of that now, but that's a lot of money to go out really, really fast.

Brian Levitt:

You forgot to tell Jay Powell.

Andy Blocker:

Exactly. Well he was in the middle of... Well, we're not going to go down there. I have so many … But yes, investment doesn't hit the economy right away. You see it on the back end, and these bills weren't as big. I mean, Inflation Reduction Act... Even saying it, it's funny. But it's actually, and most economists agree with this, it's not as inflationary as the other things. That's the whole point. It's really about investment. And so, it's got a longer-term spend. Even in the infrastructure bill, that was a longer-term spend. We talked about that, how it's over a 10-year period. I think these are investments we need to make now. I don't think there's inflationary, but they're going to be immense benefits down the road.

Brian Levitt:

Jodi, it reminds me of when the American Tax Payer Relief Act increased my taxes.

Andy Blocker:

Don't even talk to me about that.

Jodi Phillips:

Good times.

Andy Blocker:

I don't want to know. I'm in one of those states where they got rid of the SALT and that's just been very, very painful.

Brian Levitt:

Exactly, exactly.

Jodi Phillips:

So Brian, is it time to ask Andy what I'm sure his favourite question is?

Andy Blocker:

Don't do it.

Brian Levitt:

Let's do it.

Jodi Phillips:

2024, what's going on? Who's running?

Andy Blocker:

We're not even past 2022. Why are you... Come on. All right …

Jodi Phillips:

I have you here. I'm taking advantage. I want to be the first to know.

Brian Levitt:

We don't ask what you want to answer, we ask what we want to know.

Andy Blocker:

My problem is I actually answer this question. So I want to give you what I've been saying for a year, and no one likes what I say but that's okay. Just got to give it to you straight.

Jodi Phillips:

At least you're consistent, that's good.

Andy Blocker:

So here we go. I'm going to start with the answer, which is going to have a bunch of moans and groans, and I'll explain why. Trump versus Biden. Okay, here's why.

Brian Levitt:

Are you groaning? I didn't groan.

Andy Blocker:

You didn't groan. I think they're the default case. I'm not saying that's what's going to happen, but if you had to put money and bet today, those are the two candidates. Why? Because each of them is in control of whether that happens. So if Trump decides to run for the nomination, the Republican party, he will win it. If Biden runs for the nomination of Democratic party, he will win it, and that's where I start with.

Andy Blocker:

So are there counter-veiling pressures on each of them? Yeah, sure, and there's a lot that can happen between now and then. I will say for the record, despite all of the investigations of former President Trump, being indicted is not a disqualifier to run for president or be president. Now being convicted is. Even if he's indicted, I'm not sure how fast the court system works where that could even happen. So that's why I'm saying if he wants it, he gets it, and I'm not sure all these investigations do anything for it.

Andy Blocker:

On Biden, I think Biden is equivocating. I mean he's gone back and forth between keeping it open and then also saying, "No, I'm definitely running," in the last few weeks. So I think that's going to see what it looks like coming into the year 2024. We will not hear from him until that time, but if he runs, he's a leader of the Democratic party, and you're going to have multiple candidates against him. And he'll have his solid 30% to 40% just like Trump would have on his side, and the math will work out that way where they get there. So there you go.

Jodi Phillips:

All right.

Brian Levitt:

My last question on that, Andy, is okay, so it's January, 2025, it's Inauguration Day. We've had a contested election. Is there any risk that we don't know who the president is on that day? Is there any risk? Bill Maher talked about this a lot on his show of two candidates showing up to take the Oath of Office.

Andy Blocker:

So I think that's why the Senate's working on this Electoral Count Act to prevent that. And so, they're being bipartisan about it, trying to make sure that the Vice President's role is ceremonial and that there's different guardrails against that.

Jodi Phillips:

Well, the next question on my list is about 2028. So we better cut this off now. We'd better cut it off now. Andy, thank you so much for joining us once again and entertaining all of our questions, and we'll see how this all turns out quickly enough.

Brian Levitt:

Thanks, Andy.

Andy Blocker:

All right, thanks, guys.

Jodi Phillips:

Thank you.