night was really, really important in that there are some really key takeaways. So let me just start off from a bigger picture perspective. It’s very likely that the republicans will have control of the House of Representatives when the votes are all tallied up and the elections are finalized. The majority for the republicans will be much smaller than was anticipated. The consensus was between 15 and 20 seats. We were between 25 and 30 seats and that number is going to come in probably closer to 11 or 12 seat gain because the republicans were already down five. That 12 seat game means that they’ll have a small majority of about seven seats or so. The biggest take away that I can give you is that this is the ninth election that we’ve held since the financial crisis and the voters of this country have removed the party in power now in eight of those nine elections. So, every two years we keep switching political parties and that political volatility is translating into policy uncertainty because the rules just keep changing. The second big take away that I would give you is that we are a 50-50 country. The senate is still not fully decided yet. It’s likely going to come down to two States, Nevada and Georgia. Both of those states will determine whether this is a 51-49 senate or 50-50 senate and both of those states are being decided by less than 1% of the vote. If you think about this, if the republicans end up winning Nevada - and I’ll walk you through the details in a few minutes - but if the republicans end up winning Nevada, that means that we are likely going to have a runoff in Georgia on December 6^th that will determine control the United States senate. If that doesn’t sound familiar to you, that’s exactly what we went through two years ago where you had two special elections that were 5050 votes that decided the election. The third is that President Biden defied history last night relative to historical expectations. Midterm elections are generally referendums on the incumbent’s first two years in office. There are very few examples where incumbent presidents were able to turn that election into a choice between the two parties. Over the last 100 years there’s only two presidents who’ve gained seats in that first midterm election, FDR coming out of the Great Depression and George W. Bush following 9/11. While the president didn’t gain seats like those other two presidents, the democrats are only likely going to lose about 12 seats. This is very different than where history would suggest. The president has a 40% approval rating. That’s usually the equivalent of losing 47 seats in the House of Representatives. So, what the democrats were able to do is that they were able to actually offset some of the kind of republican advantages on inflation, on crime, and if you look at those exit polls, both climate change and a woman’s right to choose were very, very high on the priority list and that tells you that the democrats were able to get out the votes. This was an extremely uneven midterm election. I still have whiplash from that 8:00 - 9:00 hour, Chris, where what you saw was a wave election for the republicans in Florida. You see that happening. Those are the early results. You’re thinking, “Wow, this could be a big night for the republicans,” and then you turn your head the other way and the republicans were literally losing incumbent republican seats in the State of Ohio. So, what you saw was pretty big gain for the republicans in Florida, but they were giving up some of those gains in the upper Midwest, which is a really, really interesting dynamic and not something that we were anticipating. As you mentioned, the market and what the market was doing - we generally look at sectors and individual stocks and how they trade into these elections and what we saw was the market was pricing in a republican sweep over the last three or four weeks. In fact, giving the republicans about 80% probability of a sweep and that’s not where we’re likely going to end. I think that the balance of the probabilities at this point is that while the republicans will win the house, they’ll win it with a

narrow majority and that it’s probably more than likely or more likely that the democrats win one of those two seats - Nevada or Georgia - and end up taking the senate and that’s not what the market was expecting going into the election overall, Chris. So that’s where we stand this morning. I’m not sure that we’re going to get the Nevada mail in ballot votes until maybe tomorrow, so it may not even be today. The republicans could still win Nevada. It just depends on how many mail in votes are out. There’s  50,000 mail in votes out in Clark County republicans are probably going to win. There’s 120,000 votes outstanding and republicans are probably going to lose Nevada. So, getting that number and figuring out what that number is is going to determine whether the republicans win Nevada or not and then if they do win Nevada, the senate will then come down to Georgia. We’re fairly confident that no candidate got 50% of the vote last night in the Georgia senate race and that means that the special election will trigger for December 6^th and it will be Herschel Walker versus Senator Warnock and that creates some kind of interesting game theory analysis about whether Herschel Walker can do better in a special election or not and looming large over that will be Donald Trump. So that’s where we stand this morning in terms of the rates itself. I’m not sure that it really changes the policy implications very much than what we were anticipating but the political scenario did change last night relative to the market’s expectations. 

has rewarded that combination that you just outlined. The average annual S&P 500 return for that combination - a democrat president, republican house, democratic senate - is 13.6 annually. I would take that any day of the week right now. So historically, we’ve liked that gridlock and then there’s a question to the degree is it gridlock? Cause there’s some gridlock you like, some gridlock you don’t like and I’ll make that distinction between the two. Much of the focus will be on what can happen in the lame duck session of congress which is the six-week period after the election but before the new congress takes in. There’s going to be some important decisions that we’re going to need to make on fiscal policy over the next couple of weeks. Right now, there’s a pretty dire outlook on whether the two parties can sit in a room and get a lot of their work done in this lame duck session in congress, but I would give it a couple days. I would let the fever cool and then I would kind of see where cooler heads prevail in terms of what can happen in the lame duck session of congress. So, what’s on the agenda? Well, let’s just say we have a republican house, democratic senate in 2023. Not much is going to get done. So, both parties have an incentive to sit in a room now, figure out the top line, and hammer out a government budget. You say, “Well, why would the republicans have that incentive?” Well, when we went through a similar situation right after President Obama’s first midterm election in 2010, the republicans created a temporary budget that, “We’ll deal with it when we take over,” and then they had a major fiscal problem both with the budget and the debt ceiling in 2011. So knowing that history, there’s some effort right now to see if one, we can get a full budget through next September, September 30^th, and number two, the president would really like the debt ceiling to get raised in the lame duck session of congress so that a new republican congress does not have to deal with that early on and of course the president does not want to be held hostage by that. If I can get the debt ceiling up in the lame duck session of congress, Chris, I have removed a pretty big risk from the financial markets in 2023. If we’re not able to get the debt ceiling up in the lame duck session in congress, then the new congress is going to have to deal with that and that means that a lot of that kind of budget trench warfare of the past few years starts to come back, and that’s not really the gridlock that the markets begin to appreciate. So that lame duck session of congress, what’s on the agenda? First is the budget. Number two is the National Defense Authorization Act. Number three is some of these Trump tax cuts expire on corporate income. In particular, the research and development tax credit. That expires. It’s the equivalent of a 3% corporate tax rate increase for this year for companies. Companies like defense companies have already started to put that loss into their financials, that cash hit, and so there’s going to be a push to get that resolved. The president is feeling awfully good this morning. He’s probably going to ask for some level of a child tax credit. It’s going to be a really hard thing to get and I’m not sure he will get it. There’s also talk about providing low-income housing tax credit subsidies. So, what I’m arguing to you, if we could summarize that, is that there might be a push to do a little bit of fiscal policy here as the economy begins to slow and try and get that done before January 3^rd. It remains to be seen whether they’re going to be able to get that done and then you’ll see an effort to try and do something on energy permitting reform, but that may also not get done in the lame duck session of congress. So, I would anticipate that you’re going to get a lot of noise around what happens right after Thanksgiving and early December. One enormous implication of the republicans taking the house is that there are likely going to be no tax increases for the next two years, Chris, and I think that is a very important development. When we had been anticipating a larger number of republicans winning in the house - when you win in a midterm, you don’t really lose seats in a presidential year. We were thinking going into this election that we may see a republican house for the next few years and possibly two years after that and if that’s the case, that keeps tax increases off the table for four years. It makes less energy regulation, it makes less healthcare, and financial regulation and that’s why we have been seeing some broad rallies in some of these sectors in the lead up to the election itself. I just think that might be less clear today because the republican majority is small, but what we do know is that those changes are unlikely going to happen in 2023 into 2024. No tax increases. No more heavy congressional regulation of energy and financials and biotech and I think that’s a much needed relief for those sectors. 

I saw was the biggest impact in this election. In August, the democrats have something called the Inflation Reduction Act. Part of that included about $300 billion of new tax credits for wind and solar and energy storage and biofuels and EVs. I think the market had been pricing in over the last three or four weeks that there would be significant pressure on those tax credits if the republicans had swept. So, you saw a pretty big underperformance of clean energy stocks even when you exclude the issues that are developing with Tesla - you just kind of exclude that out there. Now that the democrats could have a chance to keep the senate, very unlikely there’s going to be changes to any of those clean energy tax credits over the next two years and possibly no changes over the next four years. So, I would anticipate that just from a tactical perspective is that you’ll probably see a little bit of a rally in the clean energy stocks if it becomes clear that the democrats are going to win the senate. There is no change in our view of energy. Yes, maybe you get energy permitting reform, maybe you get a little bit less regulation, but the inventories here on energy are really, really high tight now and the FPR is not going to be drained now that the election is over. So, I anticipate that oil prices are going to go up and I expect that energy will continue to outperform regardless of what happens in the election. I got to tell you, even on the healthcare side, it’s just biotech and pharma are good places to hold in this kind of peak, but the elevated inflation type of environment and I think there’s still some room for those companies to run. So, we’re not changing our sector outlook at Strategas based on the midterm election results. Tactically, there could be some changes there, but nothing fundamentally changes. Then I’ll just give you this one other data point because there’s a lot of things that we don’t know but what we do know is that we’ve passed an infrastructure bill one year ago, Chris, and what we know is that it takes about a year for that money to get out. You’re really starting to see a broad rally in the infrastructure stock now that those companies are having visibility on the funding. Those companies are also likely to benefit from more onshoring based on the geopolitical developments that are developing and US policy that’s trying to kind of bring home more development here. I don’t think the election changes that in any way. 

instructive and important point, is that four years ago when we had a midterm election, the democrats picked up 40 seats in the house. We had gridlock and we may have had a month or two to enjoy just not having politics in our life. Immediately – immediately - in 2019 you began to see financial markets pricing in the 2020 election. How do we know this? You can literally take managed care stocks, run them relative to the S&P 500, and loop them over Bernie Sanders’ and Elizabeth Warren’s odds of winning the democratic primary and they happened immediately in 2019, almost two years before the election. That’s what makes your question here so relevant, Chris, in that what you’re going to start seeing is the market immediately moving to handicapping what’s going to happen in 2024. I got to tell you, I have like maybe three client question emails.

Twenty of them are about Trump’s viability next year. Just what has been unanswered in my e-mail box this morning from institutional investors. So, let’s break this down. Donald Trump had a horrendous evening last night. It was so bad for Donald Trump because Donald Trump endorsed several candidates and made them his candidates. That includes Baldock in New Hampshire, that includes Herschel Walker, it includes Dr. Oz in Pennsylvania, and Blake Masters in Arizona. In nearly every single one of those cases what you saw was the republican governor run very strong races and the Trump endorsed senate candidate running pretty, pretty, pretty weak. So that dramatic underperformance has now hurt the republicans in the senate and Trump is going to take a lion’s share of the blame for that. This is why Trump is talking about coming out and announcing for president next Tuesday because he’s trying to get one, ahead of a potential Department of Justice indictment and two, to slow down where there could be momentum in the republican party. We are just out of our minds reading the crosstabs of the Florida governor’s race yesterday with Ron DeSantis. The crosstabs, Chris, are amazing. Ron DeSantis got nearly 60% of the Latino vote. He won Miami-Dade County. When I was in politics, Chris, Miami-Dade County would go 350,000 votes to the democrats. Okay? This is a major change. He got 47% of the women vote while campaigning and governing as a conservative. Okay? So to me, you’ve set up that republican primary almost perfectly last night where you have Trump, who’s responsible now for losing two times in the US senate - 2020 and again this time - and DeSantis saying, “I could show you the new model for how republicans can win and look at what I’m doing in Florida overall.” Now, there are going to be some candidates on the republican side who are going to want to challenge Donald Trump and I would just argue the more candidates that get in that primary, Chris, the more you dilute the anti-Trump vote, the easier it becomes for Trump to win. So I never count Donald Trump out. I think there’s a lot of people on the republican side who never liked Trump or trying to count him out but last night was a serious blow. It reminds me a lot of 1998 republicans unexpectedly did not do well after trying to impeach Bill Clinton and the party gravitated towards the states and those are going to be the new leaders on the republican side. President Biden this morning feels really, really good. He overcame history to a certain extent. His staff were making it abundantly clear this morning that they are planning on running for president. We’ll see where they’ll be in three or four months from now. We’ll see where many of the people in the party - the democrats have a really bad map in 2024. They’re going to be running in a lot of republican states to try and maintain the senate and they may not want to run with Biden but for now, Biden saying he’s going to run. Chris, I just spent ten weeks traveling America, meeting with voters, meeting with high-net- worth individuals, speaking to my institutional clients. I love my tour of America and if I can give you one key take away from that, I’ve noticed that American voters are yearning for a cycle of competency. They’re looking for younger, more energetic, and policy driven candidates than we’ve seen over the past two presidents or so. I think that’s what was reflected in the results last night, both for republicans and democrats, where nearly every governor who governed in a responsible way was reelected pretty easily last night, and I think that’s going to be the biggest take away for 2024. So, Chris, we’re going to have a circus. We’re going to have a circus in both parties for 2024. The market is going to start anticipating outcomes almost immediately, but I think once we get through that circus, America is going to come out with two very well respected, competent, and policy driven candidates and I think 2024 election is going to be one of the great elections of our lifetime. 

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