It was a shortened week last week due to Martin Luther King Jr. Day on Monday. The week opened Tuesday with the worst day for stocks since last April, as the S&P 500 fell more than 2% over worries about Greenland and tariffs. Sure enough, those worries quickly dissipated later in the week and stocks gained the final three days.
Overall, this is still a bull market and we continue to expect to see higher prices, but it won’t be a smooth ride. We are in the heart of earnings season now, with many large names set to announce quarterly results. We remain optimistic that earnings will come in better than expected, justifying this bull market.
Let’s Talk About Politics
With all of the latest news on Greenland, tariffs, the Federal Reserve, and more, as well as the completion of year one of President Trump’s second term last Tuesday, we decided to take a look at politics and markets this week. We’ve seen so many investors get worked up over politics over the years and miss huge gains. And the effect has been bi-partisan—investors on the left and the right are equally vulnerable, although obviously at different times. How many were convinced a recession was coming last April, for instance? And, as a result, sold near major lows because they saw on the Sunday morning talk shows how bad tariffs were going to be. Sadly, a lot did, including many investment managers, causing them to underperform benchmarks.
Similar to beer before liquor, politics and investing don’t mix. We’ve shared the chart below for years now and it is important to remember that stocks have bull markets and bear markets under both parties. We saw so many investors say they didn’t like President Obama and miss out on eight great years. Many didn’t like President Trump 1.0, and they missed out on four good years. Or they didn’t like President Biden, again missing out on solid gains. Now we are back to Trump 2.0, and we’re hearing the same things. Bottom line, don’t mix politics and investing!
Midterm Years
As we discussed in our recently released 2026 Market Outlook: Riding the Wave, midterm years can be rather volatile. Here’s a nice chart that shows how the four-year presidential cycle looks. We still think this year will be a solid one for investors, but good to be aware.
Speaking of midterm years, no year in the four-year cycle sees a larger average peak-to-trough pullback than the midterm year at 17.5%. Of course, a year off those lows, stocks have never been lower and are up more than 30% on average.
Who Is Better for Stocks?
We know, we know, readers still want to know who is better for stocks. Well, technically, it has been when a Democrat is in the White House, historically.
Now, don’t worry, if you didn’t like that one, because you’ll love our next one. You could argue more gets done when one party controls both chambers of Congress, and under this scenario, stocks do much better under Republicans.
But History Suggests Split Congress Is the Best
Here’s the thing, though—when you have a split Congress, markets tend to do even better.
In fact, the past 13 times we had a split Congress, stocks were higher every single time! Maybe the best Washington is one that can’t get anything done? Or, if you want to be more optimistic, a Congress forced to find common ground and compromise.
Which brings us to now. Please don’t shoot the messenger, but Republicans currently have a historically small majority in the House (just two seats) and will likely lose the House in the midterms later this year. In fact, only three times in the past 23 midterms did the party in the White House add seats, and the average was a loss of nearly 27 seats.
Now, it is widely assumed the Republicans will keep control of the Senate, meaning we’ll likely have a split Congress after midterms. Here’s another one that shows returns under a split Congress have historically been nearly twice as strong as with a unified Congress.
One Year Later, Policy Continues to Go Wild
President Trump took office just over a year ago, and markets continue to experience volatility as he pursues his policy ambitions, although the direction overall has still been solidly higher. Tariffs remain a worry at the margin. In our 2025 Outlook, we warned that tariffs were a looming threat. That materialized in dramatic fashion on Liberation Day (April 2, 2025), but as we noted a year ago, President Trump likely sees the stock market as a report card on his performance, so a negative market reaction can prompt him to temper some of his proposals. Last April, negative reactions in the stock and bond market led to a significant pullback on tariffs, including several key products (especially related to AI) getting exceptions.
While most of the tariff headwinds are likely behind us, the risk has clearly not been eliminated, as the president (“Mister Tariff”) reminded us this past week. He initially threatened to impose large tariffs on countries that oppose his intention to control Greenland, which includes Denmark, Norway, Sweden, France, Germany, and the U.K. But he then backed off when markets expressed their dissatisfaction, similar to the dynamic we saw last April. It just seems like the administration doesn’t have a very high tolerance for a negative market reaction, and this may be even more true as midterms start to loom (more on that below).
Then there’s the upcoming Supreme Court decision on last year’s tariffs, which may be out late next month. If the Supreme Court rules against the administration, it could make everything go haywire, as the administration would be forced to scramble and re-up the tariffs using other authorities. Some of those would require Congressional approval (good luck with that) and others are bureaucratically cumbersome to impose as they require long, drawn-out investigations. But if there’s one Trump policy markets have been decisively unhappy with, it’s tariffs, so while a ruling striking them down may be a bad scenario for the administration, it may be good for markets.
Midterm Year = More Populism
On the positive side, there are a couple of tailwinds, especially ones that the administration would be more than happy to tout. As we wrote in our 2026 Outlook, the tax cuts passed by Congress last year will make an immediate impact in the first half of 2026, including lower tax witholding for paychecks (boosting take-home pay) and higher refunds.
We expect the Fed to continue their cutting cycle, though this may only restart after Trump replaces Fed Chair Jerome Powell and puts in his own person as Chair (presumably someone amenable to cutting rates). BlackRock’s Rick Rieder emerged as one of the lead candidates last week, according to prediction markets. Markets may cheer having a Fed Chair who has a reputation as a sophisticated interpreter of market signals, not just someone who waits on slower moving, lagged economic data.
Of course, it’s also a midterm year, which means lawmakers are a little more prone to going populist, even more so for the current administration. We saw a slew of policy announcements over the last several weeks, including:
- Taking over Venezuela’s oil and pushing US energy firms to invest money and rebuild Venezuela’s decrepit energy infrastructure to boost production and drive oil prices lower (and, therein, gasoline prices).
- An increase in the defense budget from $1 trillion to $1.5 trillion for a “dream military.”
- Not permitting defense companies to return cash to shareholders via dividends and buybacks unless they speed up production and maintenance of military equipment.
These are remarkably market interventionist proposals, quite unlike anything we’ve seen in recent history. This is in addition to Trump announcing $2,000 tariff dividends for households (again, this is unlikely to happen without Congress, and that’s a longshot now), something he’s been floating intermittently for a while.
Trump Takes a Few Swings at Affordability
Affordability is a key source of angst amongst households right now, amid elevated inflation over the last several years and low real wage growth. It’s no surprise that the administration wants to tackle this before going into November elections.
Trump recently called for a one-year cap on credit card interest rates of 10%. While on the surface this may appear to be a panacea for those with large credit card debt (and high interest rates on that debt), it’s likely to limit credit availability. A lot of households may even see their cards being canceled by banks. The reality in the credit card business is that there’s a lot of cross-subsidization. Credit card companies make a lot of money from interest on loan balances that are not paid off in the first month they are incurred (revolving balances) and late fees. That allows card companies to offer loans to subprime borrowers, as risk-based pricing subsidizes access. It even allows companies to offer rewards for more affluent customers.
In other words, a subprime borrower has access to credit cards because the bank can charge a 20% to 30% APR. Same with rewards, which also rely on behavioral inefficiencies and consumers who revolve their balances. Remember that points/rewards are a liability for credit card companies. If margins shrink, the liabilities get repriced, which means reward and premium benefits shrink. Premium rewards will require more explicit, higher fees, since there’s no longer hidden cross-subsidization. It’s also likely to force less credit-worthy borrowers into riskier borrowing channels, and will also benefit debit over credit. Credit becoming more scarce and less flexible isn’t great for the economy, since credit is a key for consumption.
Affordability is a problem even on the housing front, thanks to mortgage rates over 6% and home prices continuing to rise (amid low inventory). This is also something the administration is trying to tackle, with a couple of notable proposals.
Trump ordered his “representatives” to buy $200 billion in mortgage bonds in a bid to lower mortgage rates and make housing more affordable. The goal is obviously to bring mortgage rates down, thereby improving affordability for prospective homeowners.
Presumably, he will direct his people at the Federal Housing Administration to have Fannie and Freddie buy $200 billion worth of mortgage-backed securities. For perspective, the two GSEs (government-sponsored enterprises) have about $173 billion of accumulated net worth. So this deployment, assuming it happens, would be significant and more or less use up the entire capital cushion these entities have built up. Markets moved quickly, suggesting investors are taking this seriously. Option-adjusted spreads (OAS) for mortgage-backed securities (MBS) dropped 0.1 percentage points after the directive was floated, which is a relatively big move. And that makes sense if a buyer who is not sensitive to price is going to come in to buy a whole bunch of MBS.
The spread is key, because even if US Treasury yields stay where they are, mortgage rates can fall if spreads compress. Thirty-year mortgage rates key off of 10-year Treasury yields, and if 10-year yields don’t move, the spread is the only way to bring mortgage rates down.
Of course, mortgage rates are not the only factor that determines affordability of a home. Home prices are also a big factor. The housing market still doesn’t have a lot of inventory. If you boost demand by lowering mortgage rates, that’s also going to push up home prices. In fact, any savings for monthly payments that come about due to lower mortgage rates may be entirely offset (and maybe even more) by higher home prices. In the interim, if mortgage rates do come down, we could see a pickup in refinancing and a temporary pickup in activity—until inventory dries up again, and then we’re back to the push-pull between lower rates vs. higher home prices.
The key thing to monitor to determine how successful the administration’s policy is will be MBS spreads and Treasury yields. If tariff threats result in higher yields, that can potentially erase any benefit from compressing spreads.
Trump is also looking to ban large investors from buying homes. The theory here is that large institutional buyers (like Blackstone) come in and out-compete potential home buyers who are looking for a single-family home. So, banning these purchases will presumably 1) reduce home prices, and 2) increase inventory and purchases by households.
The problem is that institutional investors, or landlords with 100-plus properties, account for just 1% of US home purchases. Institutional investors represent ~3% of single-family rentals, but closer to 0.5% of ALL single-family homes. Most single-family rentals are actually smaller landlords. The reality is that large single-family rental operators like Blackstone are also focused on cap rates and yields, and competing with homeowners on low-inventory/high-priced homes would kill yields. They probably focus more on homes undervalued by the market, since they can do repairs much more cheaply with the crews they typically work with. Competing with homeowners in bidding wars will push up market prices and crush yields.
Also, after the financial crisis, mortgages for starter homes became rarer, so the only buyers of cheap single-family homes were institutions looking to rent them out (and frankly, these homes wouldn’t have been built otherwise). The ban on institutional ownership is going to do nothing for home affordability on the price front, and it may make things worse by reducing the inventory of homes, which would only add to the current problem. Institutional buyers buy a lot of homes directly from builders (and rent them out). This also keeps construction demand going at a time when housing is weak. However, if these firms are forced out of the market, builders will take a hit, as will construction.
Now, all real estate is local and there certainly are pockets where institutional investors are a much larger player, especially locations in the South and Southwest, including Atlanta, Phoenix, Nashville, Orlando, Tampa, Vegas, Charlotte, Austin, and Dallas. However, in all these areas, home prices are actually easing and, in fact, rents are falling at a faster rate than in the rest of the country.
All this to say, a lot of these proposals may not have the intended effect. Ronald Reagan’s old quip about the nine most terrifying words in the English language—“I’m from the government, and I’m here to help”—applies equally to Republicans as well as Democrats. At best, we believe these policies would be neutral and, at worst, they could make affordability worse. Of course, a lot of these proposals will require Congress to get involved, and passing anything with a two-seat Republican majority House may be almost impossible. Still, don’t expect the policy proposals to stop coming in. As we noted at the top, it’s a midterm year, after all.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly traded companies from most sectors in the global economy, the major exception being financial services.
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Compliance Case # 8736431.1.-0126-C
