US midterms – takeaways and market response

Vaughan Nelson CIO and CEO Chris Wallis shares his thoughts on the US mid terms – the key takeaways, long term consequences, and the anticipated market response.

Podcast recorded on 5 November 2026

Transcript

Dan: Welcome to the Vaughan Nelson Podcast. With me today is CEO and CIO, Chris Wallis. Welcome, Chris.

Chris: It's great to be here, Dan.

Dan: All right, Chris, good to have you back. And we're doing this right on the heels of the midterm election. Today's Thursday, election was Tuesday. Maybe some surprises for some people out there. And as we saw, a big blue wave, if you will, coming across the country. So a few questions for you today. What are your key takeaways? What do you view as, as any potential long-term consequences or shakeout from this? And then, lastly, tie this into what we're doing here and what do you anticipate from the market as a response?

Chris: You bet. I think you’ve got to step back and, and put all of this in the proper perspective. And there's no question that attacking Iran when they did was just moronic as far as the economic consequences and the consequences going into a midterm election. And even if you thought it was the right thing to do, just do it later. So it was very much a self-inflicted wound.

But even taking that off the table, investors need to look at this through the lens of populism. And yes, higher diesel prices were an issue, but that's pretty temporary. It's pretty short term. That can come off. People can look through it. What they're really saying is we've had enough with the high cost of living. We elected you to address healthcare. We elected you to address housing and you're not addressing any of those. So we're tossing all of you bums out and we're going to bring in a separate set of bums to see if they'll do it.

Now, this is really consistent with periods of populism. When you get into periods of populism, you get very volatile politics because the political establishment and the political class is not going to fix any of these problems. They can't fix these problems and get reelected in their mind, and they're probably accurate in that regard.

And people tell you, voters tell you that the problem is inflation and the vast majority of those voters aren't being specific enough. It's not inflation. It's not that the cost of prices is going up too fast. It's that they went up too much and we're not catching up and we want prices lower. They're not arguing for less inflation. They're arguing for deflation. They're arguing for home prices to fall. They're arguing for healthcare premiums and the cost of healthcare to fall.

In the case of healthcare, you're talking about 20% of the economy. They're basically saying, "We want to bankrupt that area and we want to do it so that we can get some breathing room." And the political class just quite frankly isn't going to do that. So we're going to see a series of volatile elections and this is to be expected.

And this is consistent, I think, with what we saw from the late '60s to the early '80s. And this gets at the heart of the issues because the political establishment and those that benefit from the current system don't want to see it change. So they're fighting tooth and nail, and that includes governmental entities, that includes international entities, that includes the corporate interest, and yet the people that are being hurt by it are demanding change and they're going to continue to demand change.

And all you have to do is go back and look at the periods in the 20s, 30s, 40s, 50s, 60s, 70s, all the way up through, and the headlines are the same and the solutions are the same. If diesel prices are too high, fine. We'll cut taxes on fuel prices. That's not the solution. Subsidising demand boosts price even higher.

If home prices are too high, we'll give you a credit. We'll help you with the down payment. We'll give you a lower interest rate mortgage. Again, those are politically expedient. They will get you reelected. They'll also drive prices higher.

The solution is always the same. You have to increase supply. So you need more homes, you need to cut permitting, you need to cut environmental regulation, you need to do all those things. You need more refineries, not less refineries. You need more drilling, not less drilling.

And those are not the answers. And we know we can look at this election and, to be cynical, you can go, "Well, they're bringing back in the party that created the stimulus that created the 30% increase in the cost of living to begin with." And the average person doesn't have time to sit and sort through this, so they're just going to be angry and they're going to vote the bums out.

And this isn't going to change, and this is going to continue until we get through the demographic bubbles, until we get to a sustainable point in the deficits. And I don't think the political apparatus is going to come at it from a rational standpoint. They're going to do what's always politically expedient because that's in their best interest and that's consistent with the political calendar to get reelected.

So expect the rhetoric to ramp up.

And I'll give you a real life example. There's no question if we look at energy prices, and let's just talk about oil prices, I can give you a case where oil's going to 200 and I can give you a case where it's going to go below 50. I can do the same thing with the distillate prices, but don't be surprised if you get both.

Don't be surprised if we get some resolution to the Middle East, we get some resolution to the higher transportation and insurance costs, and you see fuel prices come down and then the Democratic Congress comes back in and fights tooth and nail to delay any more drilling activity, delay any more fossil fuel production to bring back and negotiate more credits for renewables.

And we are on the cusp of the need to invest heavily in fossil fuel production. It's just a natural cycle and we've underinvested in it for nearly 10 years and we're getting ready to pull that off the table when we're going to need it most.

So fuel prices could fall, oil prices could fall, demand would then increase at the same time we pull back on energy, which would create a bigger super cycle for fuel prices going into the 28, 2030 election. You can only imagine what that's going to do and the turmoil that it's going to have.

So I think it's important for investors to don't think there's going to be calm, don't think there's going to be a solution. This is the new normal till we get through this and we're going to see increased populism and that has ramifications for winners and losers because we're in a fiscally dominant world. The government is going to choose the winners and losers.

We're in a world that relies on and needs the liquidity provisioning from a coordinated effort by the Federal Reserve and the Treasury. And again, that's more government designated winners and losers. And because of that, it's going to have implications on inflation rates, whether they're higher or lower on interest rates, whether they're higher or lower.

And that doesn't even get into the imbalances we created by the over-reliance on the data center investment in order to generate economic growth.

So I think from an investment standpoint, you've just got to have real clear vision that you don't know that you are going to be beholden to the political calendars. And when you're looking for investment opportunities, it's not going to be, oh, we know this has to work because the rules are going to change to get to sustainable deficit funding, which we're going to have to do between now and 2030, or we're going to restart QE and have a whole different set of issues on the inflation front, that's going to require a spending consolidation, which will be changes in tax rates and cuts to benefits and things of that nature.

So there's just going to be a lot of change out there. So you've got to be uncomfortable or you got to be comfortable with a chaotic environment and don't think you know what's going to happen, which means you're just incrementally a little more conservative in your investment approach.

You don't want to pay too far forward for hope and growth. You want to be pretty realistic about where margins are going to mean revert. And you're going to see, as we have seen, a higher equity risk premium.

Dan: One of the things you did touch on are rates and we saw rates move up a cycle ago and then say flat most recently. Do you think that the outcome of Tuesday changes the rate outlook for the US?

Chris: It's hard to say. So again, and I'll go back over the last 27 years of my career, I would've told you that elections never mattered. And this one was the first where I'd go, "Yeah, this one's going to matter, but the 28 election's going to be even more important." And those are going to start to have an impact on interest rates.

The knee-jerk response that we saw the day after the election has a lot to do with the hedging and the positioning that was in place going into the election. And so the price movements, the winners and losers we saw was really just a clearing event and an unwind of those positionings.

But if you wanted to step back, what it really said was, "Hey, a little less growth, a little less inflation, and a little weaker dollar." And that was the theme that came out of that.

I think those are going to be the trends, whether there was no change in the makeup of Congress. We are set for inflation to be peaking. We are set just... And again, this is just base effects. This isn't anything to do with a policy decision. It's just rate of change and lapping those difficult comps as you go in the first half of next year. You were going to see inflation come down and we're going to see it.

We were going to, and we still are, going to see a broad base slowdown in economic growth in the United States, in the industrial sector, in the tech sector, and in the services sector. That is baked in the cake, which is why when the Fed raised rates, the curve flattened. And that's the market saying, "You knuckleheads, y'all are raising rates into another slowdown."

And we can see that slowdown's going to last at least through June. We'll get more data and see if it's going to last longer than that. But right now, it's just a slowdown.

Now, I will take that slowdown off the table and tell you it's going to be even better than that if we really do see a correction in energy prices and fuel prices. They are a huge issue from a margin standpoint and a discretionary spending standpoint.

And we also need to step back, and this is kind of what may be unrelated to rates. This is something I don't think participants really appreciate.

If you go back and look, when we stimulated during COVID, that COVID stimulus resulted in a lot of consumption that benefited China and other countries because we imported so many goods that we consumed.

If you look at the excess reliance on the data centre investing in the US to drive growth, so let's say corporate investment growth, X data centers is minus 5%, and then we're massively positive because of the tremendous growth in data centers. What came with that? Very large imports, right? We are importing a ton of goods from Asia, not just China, Korea, Taiwan, Japan, other areas in order to build out this infrastructure.

Those imports, which are imports to us, which are exports to them, really boosted their economies at a time when energy prices would've really put them in a desperate position. So this excess data center spend that we've seen in the US, as much as it's positively impacted our country from a wealth effect in the stock market, from on the ground business activity, it's really benefited the rest of the world.

So if we do see a slowdown in that data center investment, don't think it's not going to impact the rest of the world as much or more. So we shouldn't be surprised at the weakness we're seeing in the COSB. We shouldn't be surprised in the weakness that we've seen in Chinese equities as well.

And so this is going to have a bigger impact if the election does impact the true pace of spending on data centres in the United States. And again, all that just means a little less growth, lower interest rates, and probably lower inflation as well.

Dan: All right, Chris. Well, that's good. Thank you. A lot to unpack there for today. So thank you so much for coming on and we'll catch you here soon.

Chris: Sounds good.

The views, information, and/or opinions expressed during this podcast are solely those of the individuals involved and do not necessarily represent those of Vaughan Nelson and its employees. Vaughan Nelson does not verify and assumes no responsibility for the accuracy of any of the information contained in the podcast.

The primary purpose of the information, opinions, and thoughts presented in this podcast is to educate and inform. This podcast or any podcast in the series does not constitute professional investment advice or services and any reliance on the information provided is done at your own risk. Past performance is not an indication of future performance.

By accessing this podcast, you acknowledge that the entire contents of this podcast are the property of Vaughan Nelson or used by Vaughan Nelson with permission and are protected under US copyright and trademark laws. Securities discussed within this podcast may be held in the Vaughan Nelson strategies.