MIKE TOWNSEND: As a political analyst, Election Night is basically my Super Bowl. As usual, I was at home watching the returns, with six different screens going as I tried to keep track of it all.
Coming into the election, it was widely expected that Democrats would easily win the majority in the House of Representatives—a long history of midterms being bad for the president's party, combined with the president's low approval ratings and polls showing voter frustration with gas prices, inflation, the war in Iran, and more, had telegraphed the outcome.
And by the time we arrived at Election Night, the polls, the prediction markets, and many analysts, including me, had coalesced around the idea that the Senate was likely to flip to the Democrats as well, though it was expected to be close, and the possibility of not knowing which party had the majority for days or weeks seemed plausible, even likely.
As I watched the returns come in, I had a little tally sheet in front of me where I was marking down results in key races. It was organized by what time the polls closed, with the earliest states at the top. The first races on the list were two specific House races, one in Indiana and one in Kentucky, the two states where most polls close at 6 p.m. Eastern Time. President Trump had won the two districts in 2024 by 17 and 15 points, respectively, so if they were close in 2026, I thought that could be a sign that Democrats were headed for a big night.
That turned out to be correct. Democrats weren't just close in the two races; they ultimately won them by three and nine points—swings of more than 20 points in just two years.
The moment that really made me realize that something historic was happening came at 11:17 p.m. Eastern Time, when the Associated Press, the gold standard for making election race calls, projected that Democrat Gina Hinojosa would oust three-term Governor Greg Abbott in Texas. Fourteen minutes earlier, the AP had called the Texas Senate race for Democrat James Talarico. Texas—Texas—had turned blue.
By that time, the scale of the rout was clear. Democrats were winning across the board, including flipping Senate seats in red states like Iowa, South Carolina, and Kansas, a state that hadn't elected a Democrat to the Senate since 1932.
So now what? Well, now Democrats have to deliver for voters. As George Washington says in the musical Hamilton, "Winning elections is easy. Governing is hard."
Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.
On today's episode, I'm going to focus on what the election results mean for the policy agenda and what they could mean for the markets. I am going to dig into the implications of a Democratic Congress trying to work with President Trump—and the pressures that will be on Democrats next year to deliver on what voters want.
To begin, let me just quickly provide a lay of the land on where things are with the vote-counting. As of the afternoon of November 10, the count in the Senate was 54 Democrats, including the two Democrat-leaning independents, and 44 Republicans, with two races, Mississippi and Alaska, yet to be called. In Mississippi, the Democrat was up by nearly 2,600 votes with the race expected to be called later this week.
In Alaska, it will take longer. As I am recording this, the Democrat leads the incumbent Republican senator by about 2,500 votes. But only about 75% of the ballots have been counted, and because of Alaska's geography, ballots that are postmarked on Election Day still count if they are received within 15 days of the election. Plus, there is ranked-choice voting that will come into play. At the earliest, I don't expect to have a final result from Alaska until the end of the week of November 16.
But there is a very real possibility that when all the counting is done, the Senate ends up to be a 56-44 majority for the Democrats.
The count in the House of Representatives stands at 255 Democrats and 166 Republicans, with 12 races yet to be called and two races in Louisiana headed to a December runoff election. As there are most every election, there are some incredibly tight races that are likely headed for recounts and litigation. Two candidates in a House race in North Carolina are separated by 99 votes, and there are three more races around the country where the margin is fewer than 320 votes. It will take a while to get the official numbers for the House, but most estimates put the Democrats right at 260 members. If that happens, it'll be the largest majority in the House for either party since 1992.
A couple of other interesting facts about the new House. There will be at least 136 women in the House, an all-time record. And there will be at least 112 first-time members, more than 25% of the entire chamber.
While the battle for control of the House and Senate gained most of the headlines in this election, there were important developments further down the ballot that I don't think are getting enough attention.
Democrats flipped at least six governor seats. There will be at least 28 Democrat governors in 2027, with 20 states having a Republican governor. Two states, Alaska and Kansas, were not yet called as I recorded this, but the Democrat appears likely to win both, which would give Democrats 30 statehouses.
Democrats also won trifectas in six states, gaining full control of the governorship and both chambers of the legislature, including in five key presidential battleground states—Arizona, Michigan, Nevada, Pennsylvania, and Wisconsin. That could be important in 2028 because governors and state legislatures play a big role in certifying elections. Arizona has not had a Democratic trifecta since 1966, while Pennsylvania's last Democratic trifecta was in 1993.
Democrats now have trifectas in 22 states, with Republicans holding trifectas in 17 states. Nine states have divided state government. Nebraska has a unicameral, non-partisan legislature, and Alaska's status hasn't yet been called.
With the courts, presidential administrations, and Congress returning more and more authority to states, state legislatures and governors are playing an increasingly important role in the daily lives of voters. Healthcare, Medicaid, education, disaster relief, social services, energy, the environment, and immigration enforcement are just some of the issues that states will play a central role in. After the election, Democrats will have considerably more influence to shape state-level policy in those and other areas over the next two years.
So that's the lay of the land after the election. But before we get to what it will mean in 2027 and beyond, we've got to first deal with the present. Because the old Congress is back in Washington. And things are likely to get weird.
That's because while current House and Senate members returned to the Capitol on November 9, they were joined by the newly elected members. For the latter, the next couple of weeks will be taken up with orientation, figuring out office assignments, leadership elections for the next Congress, and briefings on the administrative nuts and bolts of being a member of Congress. That happens side-by-side with the old Congress debating bills and taking votes. And for the more than 125 current representatives and senators who lost their elections or are retiring, it's also about cleaning out your office, shutting down operations, saying goodbye to staff, and thinking about the next stage of your career. So not a lot of substance is expected, really, between now and Thanksgiving.
Lame-duck sessions are notoriously strange. Those more than 125 members of Congress who are either retiring or just lost their re-election bids—their interest in hanging around Washington for the next six or seven weeks is pretty low. So these lame-duck sessions typically end with a whimper and not much accomplished.
Yet some Republicans in the "old” Congress are also hoping to take advantage of having the House and Senate majorities for two more months, and they have a long wish list, including a defense bill, a farm bill, a highway bill, confirming as many of the president's judicial nominees as possible, and more. Some have even talked about trying to pass a partisan bill that increases the debt ceiling, though I think that is highly unlikely.
There is one thing on the to-do list that absolutely must happen, and that is government funding, which runs out on December 11. Congress will have until then to pass an extension of funding or risk a government shutdown. The most likely outcome is another short-term extension for a couple of months that funds the government until, say, February, which means the new Congress that officially takes office in January will have to deal with that deadline. But the dynamics of these lame-duck sessions are so complicated that a government shutdown next month can't be completely ruled out.
Once the lame-duck session ends, the countdown will begin to January 3, 2027, when the new Congress convenes, and a new set of lawmakers takes the oath of office. And that's when the pressure will start for Democrats to meet some of the goals that the voters have set for them. But what will it actually mean for policy in Washington? What can Democrats do, what might they do, and what can't they do? And how much will the president use the power of his executive office to push back? Democrats will be under the microscope when it comes to addressing the economic and affordability issues that most voters cited as their biggest concerns in this election.
The scope of the Democrats' victory gives them flexibility. For much of the past year, Republicans have effectively had a two-seat majority in the House of Representatives and a margin of three seats in the Senate. Particularly in the House, that narrow a margin is virtually unmanageable, as the opposition of just three Republicans was enough to kill a bill that had the support of every other House Republican. Democrats, on the other hand, are likely to have a more than 40-seat cushion, which will make it easier to pass bills through the chamber, even if not every Democrat is on board.
But even after a huge election night that saw Democrats flip at least seven and possibly as many as nine Senate seats, Democrats will still be short of the 60-vote supermajority needed to overcome a filibuster. And that leaves two choices—find compromises that can attract a handful of Senate Republicans to vote with the Democrat majority or use the "budget reconciliation" process to pass a party-line bill, the same parliamentary procedure that Republicans used in 2025 to pass the so-called One Big Beautiful Bill.
Of course, either tactic carries with it the specter of a presidential veto. In the past week, President Trump has both referred to himself as "Mr. Veto" and said that he "looks forward to working with Democrats for the good of the country." Navigating between those two polar opposites will be the biggest challenge facing Democrats over the next two years.
For Democrats on Capitol Hill, another benefit of a big electoral victory is retaking control of the committees. Committees are where most of the nitty-gritty of legislating takes place. Committees and subcommittees hold lots of public hearings to shine a light on issues. Congressional hearings have evolved over my three decades in Washington, and I've come to think that today they are mostly a waste of time. Instead of diving deeply into the issues, they have descended into competitions for who can generate the snappiest soundbites and have a "gotcha” moment with a hostile witness from the administration. We are going to see a lot of those kinds of hearings over the next couple of years, as Democrats force witnesses from the Trump administration to testify, mostly for the opportunity to yell at them in an attempt to create a viral moment for social media. For Trump administration officials, these will be mostly annoyances, occasionally humiliating, but, in the end, they will do little to derail the administration's agenda at the regulatory and Cabinet agencies that it still controls.
Where the committees on Capitol Hill do play an important role is in the details of crafting legislation. Few people pay attention to what are known as markups in Capitol Hill parlance, mostly because they can take eight, 10, 12 hours, and sometimes longer as committee members offer amendments, tussle over the wording of certain parts of a bill, and try to make substantive changes to legislative proposals. But those are the bills that eventually end up on the House or Senate floor and can ultimately reach the president's desk.
The House Financial Services Committee is one of the largest and most powerful of the committees on Capitol Hill. On the Republican side, its members were decimated on Election Day. Out of 30 Republicans on the committee, 14 are either retiring from Congress or lost their re-election bids. Among those losing was the committee's vice chair, the chair of the subcommittee on digital assets, and the chair of the subcommittee that has oversight over the capital markets.
On the Democratic side, Congresswoman Maxine Waters of California is poised to return to the chair of the committee, a post she held from 2019 to 2023, the last time Democrats held the House majority. There's a bit of intrigue surrounding Waters, as she is 88 years old. A younger member of the committee, Representative Sean Casten of Illinois, who is 54, is challenging Waters for the chairmanship, a position that will be voted on by the entire Democratic caucus. Waters, who is something of a legend on Capitol Hill, is expected to win easily, but it brings to the fore uncomfortable questions about the age of some of the Democratic party's leaders.
Last week, Waters sent a five-page letter to her colleagues, making her case for why she should get another term as chair. She said she would rename the panel to the "Committee on Housing and Financial Services" to emphasize the importance of improving access to housing to the Democrats' policy agenda. Among 15 policy priorities she listed were artificial intelligence, crypto, financial modernization, and combatting fraud. She also mentioned "expanding opportunities for our constituents to safely invest in private companies"—an area that could draw some support from Republicans and the Trump administration.
Over in the Senate, Senator Elizabeth Warren, the Democrat from Massachusetts, is expected to become chair of the Senate Banking Committee. Warren is a firebrand progressive with a long history of antagonizing Wall Street. She has already said that she will be conducting investigations of big tech companies, Wall Street banks, cryptocurrency businesses, and more. She wants to crack down on prediction markets, pass a bill to cap credit-card interest rates, prohibit grocery stores from using dynamic pricing to raise prices, but also work across the aisle on a bipartisan affordable housing bill. She'll be a big player in the Senate Democrats' agenda over the next two years.
Democrats have already begun outlining that ambitious agenda of policies they plan to pursue in early 2027. But relatively few of them are achievable—and Democrats know that. I expect the party to move quickly on efforts to oppose the war in Iran, both with votes to disapprove of the president's actions and votes to defund the war. But the president can veto those approaches. And Democrats are far short of the two-thirds majorities needed in both chambers to override a presidential veto. Still, Democrats think there is value in getting their Republican colleagues on the record about the war and forcing the president to defend to voters why he wants to continue it when it is so clearly opposed by a majority of Americans.
Democrats will also try to use their powers to oppose the president's tariffs—but again, this will be difficult. Over a period of decades, Congress has ceded much of the authority on tariffs to the chief executive. Congress could try to claw back some of that authority, but the president can veto those efforts. Democrats think pushing back on tariffs is important in order to put their Republican colleagues on the record.
In the end, it may be the courts that are the most likely source of real opposition to tariffs. The Supreme Court already ruled last year that many of the president's tariffs were unconstitutional, and that resulted in nearly $160 billion in refunds to companies that had paid the tariffs. The president quickly pivoted to using different authorities to re-impose tariffs. Court challenges to the new batch of tariffs are working their way through the system now.
Addressing the war and tariffs, the two big issues that economists point to as contributing directly to the high prices for gas, groceries, and other goods, will be a starting point for Democrats—but, as noted, there really isn't much they can do beyond symbolic victories on either issue. So what else will Democrats focus on to try to respond to voters?
Many Democrats want to pursue legislation to increase the federal minimum wage to $15 an hour, another issue unlikely to attract bipartisan support. Another priority, expanding low-income housing tax credits, faces a similar fate.
Health care is another area that is sure to see votes in the early days of the new Congress. Democrats will push legislation quickly that repeals the Medicaid cuts that were part of the One Big Beautiful Bill and reinstates the Affordable Care Act's premium health care tax credits that expired at the end of last year. Both issues could struggle to get the necessary Republican support in the Senate to reach the 60-vote supermajority, but some Republicans might be willing to support the changes as part of a larger negotiated deal. Democrats will also push to lower pharmaceutical prices and increase transparency in health care pricing.
If you're hearing a theme in my rundown of these issues, you're not wrong. It's hard to see Republicans and the president getting on board with many of these Democratic priorities. For Democrats, attempting to pass these initiatives is crucial because they hope they can then point to Republican opposition as a reason voters should elect a Democratic president and retain the Democratic Congress in the 2028 elections.
One issue that could attract some bipartisan support is an issue that was clearly on the ballot last week—data centers. Few issues today have united the public quite like opposition to data centers, which is now consistently polling in the 70 to 75% range. Opposition to data centers was one of the decisive issues in races across key states like Colorado, Ohio, Pennsylvania, South Carolina, and Texas.
As a result, the data center issue, unlike most issues these days, does not seem to be a strictly partisan one, where Democrats are on one side and Republicans are on the other. Much of the action on slowing the data center build-out is likely to take place at the state level, but expect Congress to get involved, too, with another run at legislation that ensures that AI companies and hyperscalers cover 100% of the cost of any infrastructure upgrades and makes certain that increased electricity and water bills are not hitting neighboring communities.
Other issues that could get bipartisan support are likely to be relatively few. The momentum for a Congressional stock trading ban has never been higher, and it wouldn't be a surprise to see that pass after a decade of failure.
Retirement savings is traditionally a bipartisan issue, and key leaders are talking about a grab-bag of provisions to increase access for workers whose employer doesn't offer a retirement plan, expand tax credits for low-income workers who contribute to their retirement savings, and mandate autoenrollment to ensure workers don't miss out on opportunities to save.
Finally, let's do some quick-hitters on a trio of other big issues and what might happen.
On taxes, I don't see much reason to be concerned about any significant changes given by the divided government.
Democrats have been clear that part of their long-term fiscal plan is increasing taxes on the wealthy. Among the ideas that have been floated are increasing the top capital gains rate, changing or eliminating the step-up in basis, lowering the exemption amount for the estate tax, or imposing a surtax on income above $1 million.
But none of those are likely to happen over the next two years with a Republican president in the White House.
Instead, expect a lot of discussion about tax policy that sets the table for a possible Democrat trifecta in Washington after the 2028 election. We have a long way to go until then, so anxiety about major tax policy changes can be tamped down for now.
Social Security is also expected to be a hot topic in Washington over the next two years.
Earlier this year, the trustees of the Social Security Trust Fund estimated that, if Congress does nothing to shore up the program, it will be unable to pay out full benefits beginning in the fourth quarter of 2032. The reason that attracted so much attention—it's in the term of the senators who were elected on November 3. It will also be in the term of the next president.
So we can expect a lot of discussion and analysis of possible solutions over the next two years. Social Security reform is likely to be a key issue in the 2028 presidential race, as I believe candidates in both parties will need to articulate how they plan to address the issue if they were to win the presidency. And the Senate Subcommittee on Social Security is expected to be chaired by progressive icon Bernie Sanders, the independent from Vermont. You can bet that he'll want to make sure the issue stays front and center for the next two years. Those discussions will lay the groundwork for what could be a window of opportunity to reform the program in 2029.
And cryptocurrency is likely to remain on the front burner in the new Congress as well. There are plenty of Democrats who want to pass something like the Clarity Act, the bill that passed the House earlier this year but collapsed in the Senate in September. That bill would have created a regulatory framework for crypto and increased investor protections. With Democrats in charge, it will likely be a tougher version of the Clarity Act. And the issues around ethics provisions targeting the president and his family's involvement in the crypto space aren't going to get any easier.
One final point on the new Washington that should not be lost in all this discussion of change: Nothing about the election changes the fact that the president and his administration remain in place. Expect the president to continue to lean into executive orders. Expect him to continue to try to circumvent or defy Congress whenever he can. The president's post-election ouster of White House Chief of Staff Susie Wiles, and his decision to replace Wiles with long-time aide Stephen Miller, one of the most hardline and controversial members of the White House team, was a clear signal to Capitol Hill that the president intends to double down on his combative approach to Congress.
The election outcome also does not affect President Trump's choices for financial regulators, as their terms are fixed and not aligned with the congressional election schedule. In fact, regulatory agencies are one of the major tools that the president has at his disposal to continue pushing key parts of his agenda, such as deregulation. Expect the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and banking regulators to keep up their aggressive deregulatory push. Heads of these agencies are likely to be compelled to testify before Congress more frequently, and hearings on regulatory and deregulatory proposals are more likely under a Democratic Congress. But these will be mostly a nuisance to these regulators, not a deterrent.
One interesting thing to watch will be how aggressively Democrats push for the president to make nominations to fill the three vacancies at the SEC and the four vacancies at the CFTC. Democrats on Capitol Hill may be willing to pair a Democrat nominee with a Republican nominee, as is tradition, as part of a deal with the president. Both agencies have been without Democrat representation for more than a year.
Finally, I want to conclude today's monologue with a few words about how the markets are thinking about the election outcome. Well, at least initially, it's apparently with a bit of anxiety. The markets first cheered the outcome, with the S&P 500® gaining ground the day after the election, likely a reflection of the fact that the election had a clear outcome and wasn't going to drag on in uncertainty for days. But November 5 saw the sharpest one-day drop of the year, with the S&P 500 falling more than 4%, while the tech heavy Nasdaq declined by 5.5% on concerns that the new Democratic majority could crack down on data centers and spell trouble for the artificial intelligence companies that have been booming.
But gyrations immediately after an election aren't unusual, as it can take the market some time to sort out the implications of the voters' choices. A longer view is more useful. Markets have generally responded favorably to midterm elections, no matter which party came out with the upper hand. The S&P 500 has been up six months after every midterm election since 1974, with an average gain of 12.4%, according to a Schwab Center for Financial Research analysis using historical market data. Widen the lens even further, and we find that the S&P 500 has been up 12 months after every midterm election going back to 1946. Of course, we all recognize that past performance is no guarantee of future results, and that is especially important to keep in mind after such a historic election.
So that leads to my reminder to everyone listening not to get too distracted by the market gyrations or the midterm outcome. You may be elated about the outcome or you may be despondent, but neither emotion is a good one for making investment decisions. It may take a few days or a few weeks for the market to sort out what happened on November 3, but long-term investors need to avoid emotion-driven investing decisions. The market generally likes gridlock, and despite the overwhelming victories for Democrats last week, gridlock is likely to be a dominant feature of the next two years.
Well, that's all for this week's episode of WashingtonWise. Because the next episode would fall on Thanksgiving Day, we're going to take holiday break and come back to you in December. The next episode will be available on December 10, when we will focus on the market outlook for 2027 with my terrific colleagues Kevin Gordon on equities and Collin Martin on fixed income. Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. And don't forget to leave us a rating or a review—those really help new listeners discover the show.
For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.
I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.
