Markets and Midterms

Author: David R. Kotok, Post Date: September 13, 2018

The countdown to midterms is now in full force, and the ads, emailings, snailmailings, and robo-phone-call invasions into our personal lives will all combine to show us the worst of America’s political ugliness as it now descends on our country. For confirmation, one need only be in Florida and watch the blur from Nelson ( versus Scott ( or DeSantis ( versus Gillum ( or (in my town and county) Buchanan ( versus Shapiro (

Market Commentary - Cumberland Advisors - Markets & Mideterms

I will comment on the last one. I’ve met both incumbent Buchanan and challenger Shapiro.

What I see is a repeating TV ad where Buchanan walks along a pretty Florida-esque backdrop holding hands with an (apparent) grandchild and offers a soft message. He does not disclose any Republican Party connection, doesn’t promote his role in the House, and never mentions Trump. That tack may change over the next 60 days, but that is what I have personally seen so far. Meanwhile, Buchanan’s attack ads on Shapiro are mean-spirited and vicious. They rely on visual distortion, innuendo, and charges that are intended to entice the viewer emotionally into a love-Buchanan / hate-Shapiro mindset. Thus Buchanan’s ads portray the same incumbent person with two different personalities. The messages were each professionally created, and they were approved by Buchanan. Shapiro seems more muted so far. He may not have the money for an ad war. And he is challenging a strong, multi-term incumbent who is in a Republican-leaning district, while Shapiro is new to this game. We shall see how this contest unfolds.

Suffice it to say, we expect the next two months to be extremely ugly and full of campaign deceit and distortion.

In Florida, all the incumbents and all the challengers are running as environmentalists. In Florida, two issues loom large: the red tide and blue-green algal blooms, and the sugar lobby’s funneling money to candidates while the sugar biz continues to poison Lake Okeechobee.

Detailed research shows that both political parties and their leaders have repeatedly promised action on these issues during their campaigns and subsequently done nothing about them once they’ve been elected. That includes the current governor, Rick Scott, who as a now-term-limited governor wants to defeat Nelson and be a US Senator. Scott portrays himself as an environmental champion. The messaging doesn’t include his history of echoing disbelief on the climate change issue or mention how he is now distancing himself from Trump on these issues. The press in Florida has documented this history and published it in editorials and columns. (See for an analysis of the tussle between Scott and Nelson over environmental issues.)

We expect huge money will be spent on campaigns in Florida. We also want to see how the newly immigrated Puerto Rican population will turn out and participate. Massive voter registration initiatives are underway. A visitor can encounter them daily. This Saturday, four different people nicely approached me while I was walking in town to the morning market. In some areas of Florida we have seen record turnouts in the primary campaigns of both political parties. Sarasota is one of those areas.

Okay, what is an investor to do?

Here are scenarios and some strategic factors to think about.

Scenario 1 has Republicans holding the House and the Senate. This scenario, should it come to pass, obviously strengthens the Trump trade, tax, and deregulation agenda. Stocks markets don’t seem to expect it, so this outcome would be a surprise that could add huge volatility to 2019–2020, with a likely upward bias in US stock prices and downward pressure in foreign markets and especially emerging markets. Markets would assume that the trade war outcomes would worsen.

Scenario 2 seems the most likely one. Democrats capture the House but not the Senate. Currently, the betting odds show this is the majority view of those who are wagering money on the outcome. (Here is a website where you can place bets on the House and Senate outcomes: But betting trends don’t make the betters right (note the Brexit vote). The betting odds do, however, provide a market-based pricing of opinion.

In scenario 2 we run up against stalemate for two years, likely investigations and subpoenas, and a possible impeachment process in the House. We have history here. Nixon and Clinton are notorious examples. Government comes to a stop. The media circus intensifies and gets uglier. The political charade ramps up for the 2020 elections. Meanwhile, nearly everyone knows (or can read) the constitutional definition of impeachment and the rules which require a 2/3 majority in the Senate. Think of it this way: The House impeachment process is akin to a grand jury investigation, but held in public. The Senate is the actual jury. Note that no President of the United States has ever been convicted by the US Senate, even though the House impeachment process has been activated several times.

In scenario 2, the investor has to assume that there are no more positive changes in the tax code or the investment climate. There will be initiatives introduced that will raise taxes and alter deregulation. These may pass the House but are not likely to get through the Senate, nor would they survive a Trump veto.

Scenario 3 is the game changer. In number 3, Democrats gain majorities in both the House and the Senate. The fight over budgets and funding, government shutdowns, and continuing resolutions comes again to the fore. Betting odds suggest that this scenario is also not the most likely outcome.

What is important for investors to realize is that any of these three scenarios are possible. Set aside your personal leanings if you can. A coldly objective and calculated risk analysis suggests that scenario 2 or 3 is much more likely than scenario 1. What action to take now is the question.

First, investors must realize that they are managing a risk profile when uncertainty is huge and events are unfolding at a blistering pace.

Next, they must try to set aside emotions (hate Trump, like Trump, don’t care – but making investment decisions on those emotions gains nothing for the investor). Markets are highly susceptible to headline risk, and it is intense. Markets are also transitioning in anticipation of trade war, trade war rhetoric, and economic changes, while central bank policy is also changing and diverging (US Fed tightening, ECB resisting any tapering).

Lastly, and for planning purposes, any additional stimulus is likely to come only from the lame-duck congressional session that occurs after the midterm and before the winners in scenario 2 are sworn in. Therein lie the mechanisms by which special interest groups can influence legislative outcomes. We will also see leadership fights in both parties. Example: What would you do with housing stocks and banking and mortgages and the GSEs if you saw that Maxine Waters (scenario 2) was going to chair the House Financial Services Committee? Would you buy, sell, or hold?

One final thing. For planning personal financial decisions, discussions with your attorney, adviser, accountant, and planner are important right now. You want to identify what action you can take now to implement some decisions under present law and before any of these scenarios are in force next year to change that law. Remember that on the day a bill is introduced in the new Congress, the outcome from it can be retroactive to that introduction. Also remember that Congress has repeatedly backdated implementations. That is especially true of extender provisions under certain tax laws, which were made retroactive during a lame-duck session.

We close with the famous quotation offered by Sir Winston Churchill in the House of Commons in 1947 when he rose and said, “[I]t has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time…” (

Sir Winston’s wisdom applies. Please register and vote. We will do so early if we can, to be sure nothing derails our intention to express ourselves in the one way that is still protected (hacking notwithstanding) in this great country of ours.

David R. Kotok
Chairman and Chief Investment Officer
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