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The 2018 midterm elections -- what comes next

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      By Andrew H. Friedman, Principal, The Washington Update and Jeffrey B. Bush, The Washington Update

      Washington - The 2018 midterms are over, and the messages are mixed. As we predicted, the Republicans held the Senate, while Democrats took the House by a lesser margin than others expected. President Trump's campaigning in statewide elections helped Republicans extend their Senate majority. But in the House, greater numbers of city and suburban dwellers chose Democrats to represent their local districts.

      Democrats also picked up seven governorships, lowering the Republican advantage to 26-24. But Republicans appear to have retained governorships in the two large battleground states of Ohio and Florida. (As of now, Florida might go to a recount.) Control of state governments is particularly important this election and next, as following the 2020 national census each state will redraw the boundaries of House districts within its borders. Those redrawn districts will remain in place through 2030, and will have an outsized effect on which party will control the House in the upcoming decade.

      Before the new Congress is seated, the existing Congress must finish up work in the lame duck session. There the primary task is funding the federal government for 2019. If Congress does not pass appropriations legislation to fund the government by December 7, then on December 8 the government will shut down.

      An appropriations bill requires 60 affirmative votes in the Senate to overcome a filibuster. Because the Republicans hold 51seats in the existing Senate, some Democratic support is necessary for passage. President Trump has demanded that the appropriations bill provide sufficient funds to begin constructing a wall on the U.S.-Mexican border. Democrats have made clear their strong opposition to that objective. The Democratic takeover of the House in the next Congress adds some urgency to the President's demand that the matter be settled now.

      Thus, the possibility of the parties failing to reach agreement on funding legislation cannot be dismissed. If that scenario appears plausible as December 7 approaches, it could roil the markets, which prefer to see Washington handle ministerial matters without fanfare. In 2013, the last time Congressional disagreement caused a shutdown, the market suffered a temporary downturn. On the other hand, by now markets might be inured to such Congressional antics and simply shrug off a shutdown as business as usual with no long term consequences. In any event, investors should prepare for possible volatility if December 7 approaches without a meaningful prospect of Congressional agreement.

      Also on the table during the lame duck session is the Retirement Enhancement and Savings Act (RESA), a bipartisan effort to extend access to pension plans for employees of small companies and to ease market concerns that impede the inclusion of lifetime income products in employer-sponsored plans. On the downside, RESA threatens to curtail significantly the use of "stretch IRAs" (a strategy that defers distributions to IRA beneficiaries). You may read the details of RESA in our September white paper, Congress Returns as the Election Looms. What we expect from the new Congress in 2019 will be the subject of our next white paper, upcoming next month.