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Our election predictions have held up and two years of divided government are upon us. Historically, financial markets have fared better in the year following midterms, after voters ushered in a divided government. There is, however, a growing sense in Washington that after three years of COVID-infused stimulus and two years of one-party rule, the hangover of austerity and policy uncertainty lies ahead.

Now, it’s time to get down to governing and doing the people’s work. We’re going to outline what to expect (and what not to) for the remainder of 2023 before all eyes turn to political warfare in 2024.

 

Be Careful What You Wish For

After the delay in the Speaker of the House’s election, Republicans and Democrats on both sides of the dome spent most of January scrambling to organize, seat, and set committee ratios. Newly minted Speaker of the House Kevin McCarthy (R-CA) cut several deals behind the scenes to secure the gavel—some of which are coming to light and some that may never. Nonetheless, the deals and resulting aftermath will have an impact on the agenda coming from the House. That being said, the Senate may well serve to cool some of the more heated legislation from the House as a saucer is used to cool hot tea (a reference George Washington is said to have made to Thomas Jefferson regarding the framer’s vision of our legislature). McCarthy’s success and tenure as Speaker will be measured by how effectively he’s able to manage and balance the more strident, far-right component of his conference with mainstream conservatives and moderates. 

 

Build Back…Benched?

President Joe Biden’s agenda on Capitol Hill came to a screeching halt on January 3 as Republicans officially took over the House. Gone are the days of Build Back Better 1.0, 2.0, infrastructure bills, and the CHIPS and Science Act (semiconductors). McCarthy and his allies in the House aren’t likely to move any of Biden’s priorities with 2024 on the horizon, and will instead focus on their conservative agenda and launching oversight probes into the Biden administration. Senate Democrats led, once again by Sen. Majority Leader Chuck Schumer (D-NY), will utilize their one-seat majority to advance Biden’s nominees for both the judiciary and agencies, as well as attempt to pass smaller, more modest components of the Biden agenda such as childcare, housing, and drug pricing. They will still need 60 votes in the Senate, and we don’t expect any compromise from the House on these fronts. 

 

Cloudy Forecast for Bipartisanship

The new Congress is just getting started, but an early reading of the tea leaves doesn’t seem to bode well for bipartisanship prevailing. We do see some exceptions on the horizon, but that level of cooperation will largely depend on how the extremes on both sides of the aisle are willing to engage or obstruct. Potential areas of cooperation include a stronger stance on China (we’re seeing that already with the establishment of a China Committee on the House side, passed with significant Democratic support), antitrust and Big-Tech legislation, and assistance to Ukraine. Given the cryptocurrency industry’s challenges in the past year, there may also be room there for legislation compromise.

 

Don’t Shoot the Messenger 

While both sides are guilty of appealing to the base as a tactic, we’re likely to see more of this from House Republicans, especially given the promises made by McCarthy to gain the gavel. The strategy won’t be lost on Democrats, however, as they’ll be countering with their own ways to box in Republicans. Some measures stand little chance of becoming law but will serve to frame the debate, rally the faithful back home, and fulfill campaign promises. These include IRS reform, abortion-related measures, climate and ESG policy, and discretionary spending cuts.

 

The Hill to Die on

We’ll hear the term “must-pass” legislation a lot this year. Four big ticket items come to mind:

  • The budget/funding the government;
  • the Farm Bill (current bill expires on September 30, 2023); 
  • the National Defense Authorization Act; and 
  • the debt ceiling.

Early battle lines are being drawn on these fronts, and we’re looking at a major clash over spending at all levels—the likes of which we haven’t seen in years. In our mind’s eye, we envision Congress finding a way to get to the finish line, but the sprint to get there will likely be riddled with significant challenges and misfires.

 

Looming Debt-Ceiling Battle

Politicians, pundits, and the news media have been sounding alarms since Washington hit its borrowing limit on January 19. The Treasury Department is taking extraordinary measures to ensure the US doesn’t default on its debt, but this will only buy the federal government a few months before Congressional action is needed. Historically, raising the debt ceiling is a frequent, routine, and bipartisan procedure (without conditions), but as of late, it has evolved into a process with risky political maneuvering and complex economic calculations. In the last 40 years, the US has raised the debt ceiling 45 times, and despite several close calls, the country has never defaulted on its debt. We expect this trend to continue. That said, even a hint of instability in US creditworthiness could lead to turmoil in the markets, such as when the debt-ceiling crisis in 2011 resulted in Standard & Poor’s downgrading the US credit rating from AAA to AA+. What started as a procedural vote has become a vigorous, robust debate about the nation’s approach to fiscal responsibility—and the stakes couldn’t be higher.

While the circumstances surrounding the debt ceiling in 2023 are politically and procedurally complex, we believe there’s ample time for the executive and legislative branches to reach a deal and avoid a default.

 

Expect Biden to Pivot

With the new constitution on Capitol Hill, the game has changed for Biden, and he will no longer be boxed in on issues critical to keeping his base in check. If the slow drip of his docu-drama ever stops, expect Biden to take a more centrist stance, targeting the same group of voters we’ve opined about for years—independents—who will be critical to his re-election if he chooses to run as expected. Look for signs of this in his State of the Union address. And, yes, there will be episodic forays into progressive territory. With Republicans and Democrats in Congress at loggerheads, we expect Washington to focus on power and policy shifting to the regulatory agencies, including a massive amount of new spending and tax policy to implement and oversee: 

  • American Rescue Plan (2021) - $1.90 trillion
  • Inflation Reduction Act (2022) - $1.22 trillion
  • Bipartisan Infrastructure Law (2021) - $1.20 trillion
  • Student Loan Forgiveness (2022) - $519 billion (on hold)
  • CHIPS and Science Act (2022) - $280 billion 

We’ll revisit many of these topics and themes throughout the year, and, just like in prior years, there will always be surprises, and we’ll weigh in on those as well. But make sure not to get lost in the Washington-and-media narratives and focus on the art of the possible.

Talk to your financial professional to help make sure your portfolio is prepared for whatever happens in Washington D.C. 

 

 

The views and opinions expressed herein are those of the author, who is not affiliated with Hartford Funds. Hedgeye Potomac Research is not an affiliate or subsidiary of Hartford Funds.

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About The Author
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Senior Policy Analyst, Hedgeye Potomac Research

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