The US midterms and your portfolio

KARI GRANT: The 2026 midterms are just around the corner, and investors are wondering what this means for their portfolio in the months and the years ahead.

To discuss this, I'm joined by Jack Janasiewicz. Jack, are you hearing a lot about midterms from our clients?

JACK JANASIEWICZ: It's something that's starting to creep into conversations. I would say just about a month ago, I wasn't really hearing much talk about elections. But over the last couple of weeks, that's slowly starting to come back into focus. And so that's a great segue into Kari, what do you think about the backdrop here as we head into the 2026 midterms?

KARI GRANT: Yeah, well, in many ways, this midterm looks a lot like previous midterms, but in some meaningful ways, it's really different. So we have a lot of retirements coming up for this election. We have over 60 retirements in the House of Representatives and 10 in the Senate. So you're talking about 10% to 15% of Congress is retiring.

Now, some folks are running for other offices, some are looking to do something different, and some are simply retiring. But that's a pretty meaningful chunk. And we're going to see a lot of turnover in Washington, a lot of new faces come 2027.

Another factor that's very different in this election is that we've seen redistricting, and this is mid-decade redistricting, not something we typically see on the scale we've seen it. So Democrats redistricted in California in response to Texas that Republicans had redistricted.

But there's lots of other states that followed-- Missouri, Alabama, Florida, North Carolina. And in the end, Republicans are going to net something like 5 to 10 seats from that redistricting, so that's different. But in lots of ways, like I said, it's the same old, same old with a midterm election. And it's really a referendum on the party in power.

And the issues driving voters this election-- primarily, you can boil it down to one word. It's "affordability." Folks are upset about the cost of living. They're concerned. And this has been something that we saw in 2024 too, so this is just a trend carrying through. I guess, Jack, back to you. Do you think that the affordability question is really backed up by the macroeconomic data, and what's driving folks to feel concerned about affordability?

JACK JANASIEWICZ: Yeah, I think we are seeing some of that still resonate. The idea behind that K-shaped consumer-- there's still, I think, some pockets where we see that exist. But I think the bigger backdrop, though, is just how strong the broader economy has been.

And keep in mind that that lower-income segment really only drives about 10% of total consumption.

The bulk of it is still coming from those high earners. And we think about things that have been driving the economy so far, things like those tax refunds that we saw earlier in the year. You also saw some of that One Big Beautiful Bill pass through-- still working its way through the system. You also see a lot of that CapEx spend related to the AI trade.

All of those things are pretty significant when you think about the supportive backdrop for the economy. And yeah, some of that might start to fade in here. But at the end of the day, the consumer, especially on the upper end, still has some pretty good firepower in here to continue to spend going forward. And I think that's the key differentiator.

Now, the bottom line, though-- it still comes back to that inflation backdrop. And that inflation backdrop is very likely going to be a product of the oil prices and what we're seeing coming out of the Middle East. So with regard to that, let's get a little bit into maybe the foreign policy side of the equation here. Is that going to be a major campaign issue as we head into the election season?

KARI GRANT: Yeah, I think it is. Generally, the prevailing wisdom is that foreign policy doesn't win you elections, but it can lose you elections. And if you look at the data, the president is polling worst on affordability. "Inflation" is the word that folks used to poll that issue, and that's his worst-polling issue. But right there behind it is the war in Iran.

So I don't think you're going to see Republicans running into the war as a campaign message. Instead, they're probably going to talk about the things you talked about-- those tax refunds, things that they've done to try and put money back in people's pockets through those additional tax cuts on tipped and overtime wages and for seniors.

But at the same time, Democrats are going to be running on the affordability message too, and they're going to be talking a lot about the war in Iran. They're going to be talking about oil and gas prices. So it's absolutely going to factor in.

So I expect what you'll just see is more Democrats talking about that issue and Republicans talking about what they've done to focus on affordability. And the question is, how do voters react to that, which issue do they put top, and who do they think is the most well equipped to deal with it.

You talked about it a little bit already, Jack, but this has been a pretty strong year for markets, despite the fact that we're in a midterm year. And I get asked all the time, aren't midterm years supposed to be bad for markets? Why are markets doing well this year?

JACK JANASIEWICZ: I think, first of all, the period from today into basically that first week of November historically, and going back all the way to 1974, the average or median stock market return for the S&P 500 has been basically zero. So we are getting into that window where the stock market tends to just trade sideways and chop some wood.

What we tend to see at this period, though, is an uptick in volatility, so something to think about there. But again, plain and simple, it's the old "it's the economy, stupid." The economy is actually doing fairly well. If you think about where recession odds were to start the year, they were a little bit elevated. Those have certainly ticked back down, and we're actually talking potentially about Fed hikes, given how strong the backdrop looks.

And so again, all of this feeds right back into that record earnings per share backdrop that we've been talking about. And when you're talking about that CapEx spend which is running something close to about 1.5% to 2% of GDP and expected to double by 2030, that's a pretty powerful backstop.

And so that all, I think, combined puts together for a pretty good backdrop for the economy, which then flows into the stock market. But we're reaching that period where we probably aren't going to see much happen until we actually get to those elections.

So with that, if we think about that first week of November, how should we be thinking about these election outcomes? What should we be preparing for after this?

KARI GRANT: You're hearing this from almost everybody. The House is going to flip, and the Senate's going to stay with Republicans. But let me break that down a little bit.

The House has been seen as something that Democrats are very easily going to win, because in 3 in 4 of the elections since the Second World War, I want to say in 9 and 10 of the most recent midterm elections, the president's party has lost the House or the Senate in a midterm year. And so the statistics, just prevailing wisdom, says Democrats are going to win.

What makes me caveat that a little bit is that redistricting that I talked about. So Republicans are starting off with a bigger buffer than they otherwise would be starting off with. So it's not a foregone conclusion that Democrats will run away with the House or there'll be a big margin. Instead, I think Democrats take the House, but it's not some huge majority like you might see in a wave election year, simply because of the structure of our congressional seats.

Now, on the Senate side, this is a little more interesting than it was a few months ago, but it's not something that I think Democrats are going to be able to easily tackle. So they'd have to flip four seats, and that would include at least a couple of seats from some pretty traditionally red states.

So the easiest seats to flip, North Carolina and Maine. But Dems would have to go on to flip something like Ohio and Iowa and Texas and Alaska. And they'd have to hold on in states like Georgia and Michigan, where they're facing some pretty competitive races. So I think we're going to see the House go to Democrats, but not a huge majority. Senate's going to go to Republicans. Maybe they lose a seat.

And things in Washington are going to look pretty similar in terms of Congress just not doing very much. There's not going to be a lot that Democrats and Republicans can agree on, but there will be some things that they can agree on. We even saw in this Congress they passed a housing bill. They passed an immigration bill.

So I could see Congress getting a little bit done next year. But what they wouldn't be getting done is big tax packages like they did earlier in 2025. So big pieces of legislation, a lot less likely, and smaller-- sort of smaller pieces of compromising legislation, more likely.

And then you got to look to the White House again, because really, that's been the center of gravity for the last couple of decades. The executive is more and more likely to use executive orders. We've certainly seen that a lot in the early part of the second Trump administration.

So investors should be prepared for a lot of activity coming from the White House-- things like tariffs, things like other executive orders on immigration, other economic executive orders. We could start to see those coming from the White House, especially when they're frustrated with Congress, unable to get a lot done. So there will be change, but I think it's driven by the executive.

JACK JANASIEWICZ: Just looking at historical returns, divided government actually does provide the best returns for the S&P 500. Going back and looking at these periods, split government tends to provide a 13% average return for the next 12 months.

Whereas if we look at a unified government, it comes in at just around 9%. And I think to broaden that out even more so, when you start to think about the average election cycle, so the four-year cycle, the second half of four-year presidential cycles tends to be very strong as well.

So to put some numbers around that, year 2 of that presidential cycle, you get roughly a 1% return about half of the time. But year 3, you get almost a 19% return 83% of the time. And then year 4, you get a 12% return about 78% of the time.

So from a stock market perspective, once we get past that November deadline, I think you're going to start to see the stock market really revert back to the underlying theme that we just talked about, which is the economic backdrop-- or the economic growth story and the earnings per share story, which is still very supportive.

Kari, I know you just mentioned that you expect the Democrats to take the House, but let's look at the potential other outcome here, where you actually have Republicans taking or retaining control of both chambers.

KARI GRANT: Yeah, if we see Republicans hold on to the House and the Senate, it's going to be by the skin of their teeth, and it's going to be a pretty small majority, just like they had this Congress.

So if you think about that, what have we seen in this Congress?

 Really painstakingly slow, partisan legislation through reconciliation. So I would expect that we would see more reconciliation packages-- things focused on potentially less government spending and cutting waste, fraud, and abuse.

But at the same time, they might also spend more on their priorities. So things right now that they're considering is giving more money to the Defense Department after the war in Iraq.

So we could see in 2027, 2028 more reconciliation packages moving to focus on Republican priorities and offsetting that with some spending cuts. But I don't see meaningful deficit reduction being the name of the game when they have the ability to pass this legislation. So I would see more stuff happening, but it's going to be targeted on Republican priorities, and we could see some government spending cuts as well.

So Jack, I guess just to wrap it up, what do you think investors should be focusing on? If, really, the election is just a milestone in the calendar, and the fundamentals matter so much more, what about the fundamentals matters in the last couple of months of 2026, and what about 2027?

JACK JANASIEWICZ: Yeah, and it comes back down to what we were just talking about, really, is that the economy matters I think a little bit more so here. And a couple of things that we're certainly focused on-- one, the AI trade. That's obviously been a significant driver of markets in here.

And I think the question still is out there-- it's what kind of return on investment are these companies potentially seeing with such massive outlays from a CapEx perspective? So is this CapEx finally starting to generate revenues?

And we're starting to see some signs of that right now. But I think as that picture becomes clearer, that gives, I think, investors confidence. And I think that'll be the underlying support going forward with regard to that. Maybe one risk to highlight on the back of that is, what about regulation in here? Will we start to see Congress put forward some regulation around AI to try to ring fence some of this? So that remains to be seen.

Another thing, obviously, is still going to be inflation. We touched on that a little bit. But when you start to think about inflation, the bigger draw for that is going to be what the Fed reaction function is.

And will we actually start to see the potential for increased rates? And any time you get any sort of financial condition tightening, in this case, through higher interest rates, that's usually going to be a headwind for the equity markets and the economy.

And maybe you also have to throw in the idea of geopolitical risk. If Iran continues to be a headache in here, the concern is what the oil prices continue to do. If they stay elevated or grind even higher, might that continue to be a headache going forward for the economy?

And then the last one, put all this together, and we sort of touched on this with your opening comments. We certainly are looking potentially at seeing a slowing economy. And again, "slowing" is just a very different backdrop than "slow."

So "slow" to me puts us on the precipice of a recession, and that is certainly not our base case call here. But you're going to start to see some of the effects that we outlined earlier starting to fade. Those tax refunds are going to start to fade away. The One Big Beautiful Bill impact-- that's going to start to fade away. And at the margin, you're actually going to see a little bit of a fiscal tightening at both the state, local, and federal level.

So put all these things together, and we certainly should start to see a modest downshift of the economy. And so how does the market react to that? So those three things, I think, are the keys that we're paying attention to as we close out 2026 and head into 2027.