When we approach the early 2030s, the government will no longer be able to fully pay out Social Security benefits. It is eight years away, says Townsend, which is light years to a member of Congress, who has a two-year term. “That’s like four political lifetimes away,” he said, “so it’s hard for them to prioritize this. All of the options are bad – cut benefits, raise taxes, raise the retirement age – and no one wants to vote for those any time, and especially in a midterm election year.” Don’t anticipate any movement on this for a while.
It could be an historic year for the Federal Reserve Board. Three of the seven seats are open, and if the nominees are confirmed, there will be, for the first time, more women than men on the board. In addition, the first female black governor will be sitting on the committee. This new, diverse group will get dropped in at one of the most crucial times in history, as there is pressure to address inflation that will ultimately lead to rate hikes. Townsend believes none of the nominees are expected to be outspoken nor will any push the Fed in another direction. As far as the rate hikes, he says to expect at least three throughout 2023, but for consumers to keep in mind that even with three hikes, interest rates will end up at about .075% at the end of the year. It’s not going to be a huge shock to the system, but historically it has been closer to zero. There will be continued monitoring of the discussions concerning rate hikes, as they will impact the economy. It will be a big issue in the elections this fall.
With every House seat up for re-election, an historic precedence that the president’s party will not win the majority of the seats in the House or Senate, it is highly unlikely that there will be any sweeping legislation passed in 2022, according to Townsend. Here are some interesting stats:
• There are 222 Democrats and 212 Republicans in the House of Representatives. All 435 House seats are up for election in November.
• In the Senate, which is evenly split with 50 senators representing each party, 34 are up for election in November.
• The president’s party has lost an average of 25 seats in the House and 3 seats in the Senate in 17 of the last 19 midterms.
• Historically, presidents with a less than 50% approval rating in the first midterm election lose an average of 47 seats in the House. President Biden has a 42.5% approval rating, which, if history repeats itself, would mean a sweeping change in power of the House.
• In addition, with the states’ reapportionment, eight states have lost seats in Congress. Texas gained two seats and four states gained one seat.
Add to this the 2022 retirements (26 Democrats and 13 Republicans), and it is not looking optimistic for the Democrats. If Republicans gain control, Townsend predicts they will bring an agenda that is likely to be focused more on score-settling than passing legislation.
The Senate race is most likely going to come down to the same six states that were close in the 2020 Presidential Election, Georgia, Nevada, Arizona, Wisconsin, North Carolina and Pennsylvania).
Do the markets care about the midterms? No matter the configuration of Congress, the market does well when there is a Democratic White House, and remember, the president holds the veto pen.
The tension between the parties is creating a lot of noise in Washington. Townsend says what’s most important to the markets is what Congress accomplishes, not who is in the majority. Don’t let the noise distract you from the key legislation that can have a much bigger impact on the markets, the economy and your investments.