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We're on to 2020!

Timely insights on the issues that matter most to investors.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Eric Stein, CFA, Co-Director of Global Income, Eaton Vance Management

      Boston - The midterm elections didn't trigger any high-level surprises in Congress with the Senate remaining in Republican control and the House flipping Democrat, as expected. Now, investors can focus their political attention on the 2020 presidential race and what should be a wide-open field of Democratic candidates.

      Of course, it seems like presidential campaigning cycles are starting earlier and earlier. For example, President Donald Trump formally announced his campaign in June 2015. And the summer of 2015 featured Republican debates with more candidates than could fit on one stage. I would expect that it won't take too long for the focus to be on the 2020 presidential campaign, and you may well see a very large number of candidates on the Democratic side, as you did with the Republicans in 2016.

      While there is much talk about divided government or gridlock -- and those words have negative connotations -- a divided government is nothing new, and markets typically do quite well in that environment.

      The immediate reaction in markets Wednesday is positive, with stocks and other risk assets rallying.1 The U.S. dollar is broadly weaker and the U.S. Treasury market is flattening, with the long end of the curve outperforming. This move in the Treasury market shows that market had some concern that if the Republicans defied the odds and kept the House, that the deficit could be even wider, which would have weighed on the bond market.

      In fact, when Nate Silver's website 538 as well as some betting markets briefly increased the odds that the Republicans would keep the House last night, the dollar rallied and U.S. Treasury yields rose a few basis points. That price action was reversed following confirmation of the expected outcome of the Democrats regaining control for the House.

      With the Democrats taking the House, there is no chance of a further tax cut. However, one potential area of common ground for President Trump and House Democrats would be on infrastructure, and President Trump said as much during his press conference today. If a major infrastructure bill were to pass, this could also weigh on the deficit and further pressure the bond market; although that is not how the Treasury market is reacting today.

      While it will be difficult to get much legislation other than a potential infrastructure package passed with a divided Congress, the Republicans should be able to easily confirm both judges and cabinet appointments given their likely enhanced majority in the Senate. In addition, markets will continue to be very focused on developments in the trade war/tariff front, as well as the potential political headlines from either the Mueller investigation or any investigations that the new Democrat majority in the House choose to pursue on the administration.

      Bottom line: The markets are digesting the midterm-election results, and so far the reaction has been favorable for risk assets. In addition to the potential political developments that investors will focus on listed above, the 2020 presidential election campaign will be here before we know it.