How markets reacted to the election and upcoming key market-moving issues for Congress, plus the latest on jobs.
The U.S. midterms delivered a clean sweep, with Democrats taking control of Congress and winning gubernatorial races in several Republican strongholds. Democrats flipped at least seven seats in the Senate and are projected to control 54 seats out of 100. They also will control at least 228 of the 435 seats in the House come January. Importantly, in state elections, the traditionally Republican states of Georgia, Iowa, Kansas, Ohio, South Carolina and Texas also ceded power to Democrats.
Wall Street greeted Democrats’ midterm victory with a sharp rally on Wednesday. (The notable exception was the stock performance of many AI-related firms.) Markets were relieved that the midterm outcomes were beyond dispute across most states, ending fears of a drawn-out process and cementing Democratic control of both congressional chambers starting early next year. Markets generally view political gridlock positively because it limits the possibility of sweeping policy decisions that could affect companies, earnings and the markets.
But those market gains were short-lived as, by Thursday, investors increasingly dumped AI names on fears that a Democratic Congress will more strictly regulate data centers and upend the booming AI capital-expenditure cycle.
The public backlash against data centers was a significant factor in races across the country; for example, in Texas, incoming Democratic governor-elect Gina Hinojosa campaigned on promises of a data center moratorium. More broadly, Democrats won gubernatorial elections in six states that rank among the nation’s most active markets for data center build-out plans (Arizona, Georgia, New Mexico, Ohio, Pennsylvania and Texas).
The market response reflects a reset in the face of what is expected to be an environment of stricter regulation, fewer tax breaks and greater environmental considerations.
Besides data centers, the focus for the next two years will likely turn to negotiations around (and the possibility of government shutdowns resulting from) “must-pass” legislation. Such bills include annual budget appropriations needed by Dec. 11, a necessary increase in the debt ceiling before the end of 2027, and the National Defense Authorization Act (NDAA), which funds the military.
President Trump will likely continue to use executive powers to drive policy on geopolitics, trade, immigration and deregulation. It remains to be seen whether the outcome of the midterms will harden his resolve on those issues or create an opportunity to temper hardline stances and reach across the aisle.
Ultimately, many interpreted the blue wave of wins as a referendum on affordability.
Despite the meteoric gains of the stock market these past years, families are struggling to make ends meet across the country. Democrats are likely to push for increased health care spending, including a reversal of cuts to Medicaid and additional subsidies, while the Republican agenda is likely to demand greater defense spending.
Since taxes are unlikely to rise in any of these scenarios, given positioning for the 2028 elections, the can will get further kicked down the road on fiscal responsibility. If fiscal deficits continue to run higher and the absolute level of our national debt remains unaddressed, we should brace for interest-rate volatility and a trend of higher for longer in bond yields and borrowing rates as a result.
As for the stock markets, they were clawing back some of those losses to end the week thanks to the jobs report that revealed gains of 165,000 payrolls in the month of October, more than double the expected number and the fastest pace of growth since August. In addition, net revisions to prior months meant the overall change in non-farm payrolls including October was 249,000. The unemployment rate ticked down to 4.1%, even as the labor force participation rate rose to 61.9%.
The only disappointment with the jobs data was the very modest increase in average hourly earnings, which are tracking at only 3.1% year-over-year and below the 3.7% rate of consumer price inflation. The double-digit price gains since COVID-19 across nearly every key category of expenditure from clothing to housing to groceries has become ingrained within the economy, making it increasingly difficult for policy markets—both fiscal and monetary alike—to provide inflation relief. But at least the silver lining of today’s economic news was a modest improvement in what had been a deteriorating employment picture.
As we come to terms with election results and the economic picture, please remember that time in the market versus timing the market is the most crucial factor to your long-term financial success. We always recommend against making wholesale changes to allocation based on events like elections, wars or even pandemics; adjustments to your long-term plan should be driven by your life events instead. Stock markets will rise and fall in the short term due to uncertainties created by world events, but over the long-term, they reflect the growth and progress of companies and, in many ways, humanity itself.
Even though we have a lot to worry about in the world, it is important to remember humanity has found ways to reset and recalibrate, and to survive and thrive throughout history, and we will do it again. Red or blue starts to fall away when we focus on the people we love and our plans.
I’m reminded of a quote from Barbara Jordan, the first Black woman elected to the Texas Senate and the first Black state senator in Texas since Reconstruction. In her keynote address to the 1976 Democratic National Convention, Jordan said, “For all of its uncertainty, we cannot flee the future.” Our goal is to help you view the future with hope, secure in the knowledge that your team is working hard to keep your wealth and legacy plans on track.
Written by a human.