All politics are local—or so the saying goes. But are all politics financial? There’s no doubt that many voters vote with their wallet, and there’ a vein of conventional wisdom that states that while social and cultural issues might generate the biggest headlines, the most important factor on election day is the state of the economy and its impact on the financial fortunes of families and individuals.
That was definitely a part of the political calculus headed into the 2022 midterms. It was a big reason why analysts and observers saw the potential for a “red wave.” From high gas prices to soaring inflation, plunging consumer confidence has seemed to be a direct reflection of “kitchen table issues.” The cost of food staples like milk, eggs, and bread has soared, and inflation has made just about everything more expensive. The headline inflation number we see from the Fed doesn’t always reflect the true impact on people, and when you consider the alarming fact that almost 56% of the nation’s population would be unable to pay for a $1,000 emergency expense, it’s not hard to see how the steep inflation we’ve experienced this year can make such a slim financial cushion feel inadequate.
Paired with the historical trend of poor performance by incumbent parties in midterm elections and relatively weak presidential approval ratings, it’s not hard to see why the forecast was what it was. The fact that Democratic candidates generally overperformed (especially here in Michigan) and the red wave didn’t materialize is a testament to just how difficult it is to make political predictions. As professional pollsters can attest, there are so many variables that can and do influence election outcomes, and the political prediction business is a difficult and sometimes humbling enterprise.
What goes into individual voting decisions encompasses both social and economic elements, and the degree to which those factors matter can change from one election to the next. Even individual voters may feel the tug of competing political instincts.
If the intersection of politics and finance is often murky when it comes to influencing how people cast their ballot, what can we say about expectations now that we know the outcomes in this year’s election (most of them, anyway)?
The good news is that we have some data on that. Since 1980, there have been seven two-year periods where control of the House and Senate was split between Republicans and Democrats. Those 14 years saw some of the biggest economic booms in the last four decades. Is it a coincidence? Perhaps. But the markets like predictability, and there is something to be said about a political stalemate that encourages compromise and limits the ability of either party to pass legislation that might fall outside the mainstream or have a dramatic impact on spending or tax policy.
In that sense, the unexpected result—which, at the time of this writing, looks like it will almost certainly result in a Democratic majority in the Senate and a Republican-controlled House—may turn out to be a positive for the economy.
For all the political drama and election coverage, what investors should really be paying attention to isn’t ballots, it’s dollars. 70% of all economic activity in this country is consumer spending. That’s a big deal. When consumers are nervous and spending less, it has effects on almost everything—including corporate earnings. With that in mind, this year’s holiday spending numbers will be a good indicator of how people are feeling about their pocketbooks, about inflationary concerns, and about the post-election political fallout.
In other words, don’t get too caught up in the political headlines. Focus on key economic metrics and notable developments with consumer spending. To drive this point home, recall that the market was up around 1,000 points just days after the election—not because of any political developments, but because of a better-than-expected inflation report. This goes to show that for all the political drama we read about, economic indicators are what we should be following, not the latest clickbait headlines we see across social media and from the corporate media.