The 2018 US mid-term elections are in the rearview mirror and lawmakers are gearing up for a tumultuous year ahead – one that is likely to have both direct and indirect effects on markets and the financial services sector.

Where Are We Now?
The Democrats now control the House of Representatives, where they gained 40 seats. It was the party’s largest gain in the House since 1974. Meanwhile, Republicans strengthened their majority in the Senate, where they achieved a net gain of two seats, having defeated Democratic incumbents in Florida, Indiana, Missouri, and North Dakota. A divided Congress means that President Trump’s legislative agenda is liable to face significant challenges. It’s an environment that will be made more difficult by two significant distractions – ongoing investigations into alleged malfeasance by the 2016 Trump campaign and the coming 2020 presidential election.

Democratic House vs. Trump
Internally, Democratic lawmakers continue to debate what approach the party will take to a White House whose dysfunction helped propel them to House majority status. Ranking officials are concerned that a flood of new investigations or formal impeachment proceedings against President Trump could backfire politically, as it did for the Republican House majority that brought impeachment proceedings against President Bill Clinton in the late 1990s. The Democratic Party – divided between a resurgent left and its more centrist veteran leadership – will work to keep their chances in the 2020 presidential contest a central focus.

Nevertheless, many members of the Democratic caucus remain interested in working to uncover information about President Trump’s tax returns and whether or not the Trump family business has intersected with the work of the White House. Further news from the Mueller investigation into Russia’s purported connections with the 2016 Trump campaign and from the New York State investigation into suspected Trump campaign finance allegations is likely to continue to roil Washington in the months ahead.

The (New) Best Interest Standard
It is anticipated that the Securities and Exchange Commission (SEC) Best Interest Standard will be finalized in 2019. The rule would require broker-dealers to act in the best interest of the retail customer when making recommendation of any security transaction or investment strategy involving securities. The proposed SEC regulation has widespread industry support and follows a failed effort by the Department of Labor to establish best interest guidelines between financial professionals and their clients.

Regulatory Resurgence?
The Democratic majority in the House is expected to try and reapply regulatory pressures that eased over the last eight years of Republican House control (2011–2019). While they are likely to be active at the House committee level, their power will be checked by the Senate Republican majority and President Trump. A wave of “messaging legislation” is likely to result – in which House Democrats propose bills they know will be rejected in order to motivate their base ahead of 2020.

Areas of focus for House Democrats could include consumer fraud and data protection, transparency in banking and housing finance, and diversity and inclusion in the workplace. Representative Maxine Waters has been nominated as chairman of the House Financial Services Committee. Her efforts to rejuvenate the mandate of the Consumer Financial Protection Bureau are likely to conflict with the mandate of its new director, Kathleen Kraninger, a Trump appointee who was confirmed by the GOP Senate majority in early December.

Trump, Tariffs, Infrastructure, Immigration
President Trump is expected to maintain a hard line against China in negotiating for increased access to Chinese markets and an end to Chinese theft of US intellectual property. Although the administration enacted a 90-day delay on raising tariffs in early December, escalation of the trade war remains a distinct possibility. Trump and his fellow Republicans are also focused on infrastructure and immigration, but whether or not the president can help achieve bipartisan legislation on these issues remains to be seen. Not surprisingly, the atmosphere is contentious, as President Trump and legislators from both sides of the aisle try to negotiate a spending bill that will end the government shutdown while funding border security measures.

Takeaways – and a Look Ahead
The US electorate is intensely divided – and passions on both sides are high. As a result, the combative nature of national politics is unlikely to diminish in 2019. Hot-blooded partisan tensions will probably be fortified by increased attention on the 2020 presidential race and any further revelations from the Mueller and New York State investigations into President Trump. While Washington turbulence has had relatively minor market effects in recent years, this could change if increased volatility, unevenness in global economic growth, and an unfinished US-China trade war continue to deliver headwinds.

 


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