Economic and Market Commentary

U.S. Mid-Term Election Outlook

07/10/2022

Libby Cantrill

Libby Cantrill, head of public policy, discusses the current U.S. political environment, how we think the mid-term elections are likely to go, and what it could mean for fiscal policy and the markets.

Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Libby Cantrill, Head of Public Policy

Libby Cantrill: The political environment can change very quickly. It has changed for Democrats pretty significantly over the last few months with declining gas prices, the overturning of Roe v Wade and President Biden seeing some legislative wins. With that said, our base case for the midterms, if the election were held today, is that Republicans would still win back the House.

Democrats have a very small majority, only a five seat majority in the House. And because of redistricting and retirements in some key districts and also generally a pretty negative view on the economy among voters on both sides of the aisle, we still expect Republicans to take back the House, albeit by a smaller majority,

Images on screen: US Capitol, Senate Floor

than they would have if the election had been held at the beginning of the summer.

The Senate is truly it's kind of a different ball of wax, only 35 of the 100 are up for reelection. Of those 35, Democrats are actually defending fewer seats than Republicans. Ostensibly, though, the control of the Senate will really come down just to a handful of races.

Those include Nevada, Georgia, Pennsylvania and Wisconsin. Ohio and Colorado, and Arizona may also be important,

I think our view at this point is the Senate really is a toss-up, maybe with slight odds favoring Democrats controlling the Senate, but really probably more of a jump ball.

Text on screen: Regardless of which party wins, we expect the Senate majority will be narrow

Images on screen: US Capitol

And I think that the bottom line, though, is that regardless of which party wins, the Senate, the majority, will be very, very narrow.

There are a few things that folks should pay attention to as we get closer to the midterms.

Usually debates, midterm debates aren't very important. But this cycle they could be important, particularly on the Senate side, particularly among those states that we that we just mentioned.

Text on screen: TITLE – What could impact election outcomes? BULLETS – Candidate debates, Economic sentiment, SUB-BULLETS – Price of gas, Price of groceries, BULLETS – Voter enthusiasm

Candidate quality really does matter for the Senate races. So as folks are able to learn more about the candidates through those debates, we could see those be inflection points. And then just the general mood, particularly the mood on the economy.

Folks are really paying attention to the price of gas, the price of a gallon of milk. And so what those look like as we get closer to the election will matter as well. And then lastly, just the level of enthusiasm.

The party out of power usually feels highly engaged going into a midterm cycle. But you're also seeing very high engagement enthusiasm levels on the Democratic side.

We expect this to be a very high turnout election, but that is something as we get closer to the midterms, we'll have better clarity on.

So I think under the two most likely election outcomes, whether it's a split Congress, meaning that Democrats lose the House but keep the Senate or a Republican Congress, meaning that Democrats lose both the House and the Senate. The market implications, the policy implications are relatively similar. Under both scenarios, we expect really gridlock. President Biden's legislative agenda will very likely be put on ice.

Text on screen: We expect gridlock on Biden’s agenda, including no increase in taxes

Images on screen: White House, US Capitol

I think specifically that means that we will not see any tax increases. The next real inflection point for taxes will be when President Trump's tax cuts expire at the end of 2025.

We should also expect more oversight of the Biden administration on things like the troop withdrawal from Afghanistan and what's happening at the southern border and on the recently announced student loan policy. And in fact, if Republicans take the House, I think we should expect them to bring a lawsuit. Trying to stop that that student loan cancelation policy.

Text on screen: TITLE – Policy implications of our base case include: BULLETS – Frozen legislative agenda; More oversight of the Biden administration; Policy volatility, including on government funding; Decreased fiscal accommodation

So legislative agenda frozen, more oversight of the Biden administration. Also more policy volatility on things like funding the government, on raising the debt ceiling. So we could see some subsequent market volatility associated with that.

And then lastly, the most important point is that we should expect not to see fiscal support like we have over the last three years.

We've basically had not only kind of a punch bowl in terms of monetary policy and very accommodative monetary policy. We've also had very accommodative fiscal policy. The Fed, of course, is sort of taking that accommodation away.

Images on screen: The Federal Reserve, US Capitol

And I think very, very likely if Republicans at least win back one chamber of Congress, we should see something very similar, sort of a fiscal policy retrenchment.

This is even in the case should the economy slow into recession. So this sort of fiscal put, so to speak, is not necessarily something that investors can rely on.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. 2604517) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.). Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.