Asset Management
Midterms: Policy, Politics & Your Portfolio
Transcript of the podcast:
MIKE TOWNSEND: The 2026 midterms are now less than four weeks away. The next 20-something days will be a blur of campaign rallies, endless television advertisements, breathless recounting of polling data and prediction market odds, and non-stop speculation.
Most of the focus is on the battle for control of the U.S. Senate and the House of Representatives. After two years of full Republican control in Washington, there's a very real chance that one or both of the chambers on Capitol Hill will flip to the Democrats.
If that happens, it will upend the current political dynamic and usher in a new one, one that will affect every policy issue, from the debt ceiling to government funding to cryptocurrency and more.
But the key question for investors is this: What will the potential outcomes of the 2026 midterms mean for the markets?
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.
Coming up in just a few minutes, I'm going to share my final election preview, including where the battles for control of the House and Senate stand, how markets typically react to midterm elections, and how some of the potential market-moving policy issues in 2027 could shake out depending on the election outcome.
But before we get to that, here are three quick updates on what's been going on in Washington.
First, Congress is officially on the campaign trail. The House left Washington back on September 16, and the Senate wrapped up its work on September 30. Both chambers will not return to Washington until November 9, the week after the election. Lawmakers will be home campaigning until then.
In its final days before taking a break, the Senate attempted to move forward on two hot-button issues that are on the minds of voters. One dealt with data centers—the massive buildings to house the computer equipment needed to power the artificial intelligence explosion that are being built at a frantic clip around the country. But a public backlash to the centers has made them politically toxic. Local residents are frustrated by the impact on electric bills and water bills due to the enormous needs data centers have for both power to run the computer servers and water to keep the facility cool. Nearby communities are also complaining about the environmental impact of the massive building projects and increased noise from the centers themselves. A national poll in August conducted by Embold Research for Heatmap Pro found that 75% of Americans don't want a data center built near their community. Politicians who until recently championed the projects as job creators are suddenly on the defensive. Last week's Senate bill would've pushed states to pressure AI companies to foot 100% of the bill for increased power and water usage to make sure that burden did not fall on local consumers. But Democrats blocked the bill because it did not have a mandate that companies do so, denying Republicans what they hoped would be a political win.
Similarly, Democrats blocked an effort by Senate Republicans to pass a ban on Congressional stock trading. Preventing elected officials from profiting off of non-public information they may learn in their roles is overwhelmingly popular with voters. But Democrats objected that the bill did not apply widely enough and that it lacked a requirement for elected officials to divest of their current holdings. In addition, Republicans tucked an unrelated voter ID provision into the bill that Democrats objected to. That bill, too, failed to attract enough votes to even move forward in the legislative process. Both issues are likely to be back on the agenda soon—if not in the post-election session of Congress, then surely in 2027. Bipartisan agreement is a real possibility on both topics, but Democrats will want to see some changes to both proposals in order to support them.
Following the two votes, the Senate gave up on trying to get anything else done before the election and adjourned. Both chambers will return after the election to face a daunting list of items, including a new government funding deadline of December 11.
Second, there has been a significant development with Trump Accounts, the new savings vehicle for babies and children that was part of last year's One Big Beautiful Bill and officially launched earlier this year. The accounts are simple brokerage accounts, invested in low-cost, low-fee index funds. Parents, grandparents, and employers can contribute, and when the child turns 18, the account becomes a traditional IRA that can continue to grow until retirement age. The headline-grabbing feature of the accounts is that the government will make a $1,000 starter contribution to the account of any baby born since January 1, 2025.
But the accounts had a slower start than expected, mostly because many parents just didn't even know that they existed. To address that, on October 1, the administration announced that it had automatically enrolled more than 60 million children for the new accounts, on top of the 7 million whose parents had signed them up previously. But that 7 million figure represented only about 10% of all eligible children—so the administration acted to make sure that all children would have an account.
In addition to dramatically simplifying the process to access these accounts, automatic enrollment should make it easier for philanthropists to make donations to the accounts—like Michael Dell, founder of the Dell computer company, who announced earlier this year that he and his wife were donating $6.25 billion to accounts that met certain parameters. The administration also announced that the accounts would begin accepting donations of stock, which it expects to result in more philanthropists donating shares of their company to the accounts.
The bottom line is that if you have a child or a grandchild under the age of 18, they probably now have a Trump Account. And if the child was born since January 1 of 2025, the $1,000 starter contribution has likely already been deposited in the account. But you must claim the account for the child. To get started, download the official Trump Accounts app.
Once the account is claimed you can begin making contributions to it. But there are other savings vehicles with different tax and contribution rules that may be more appropriate for your situation, so be sure to consult your financial advisor for guidance.
Finally, over at the Securities and Exchange Commission, the longest serving commissioner stepped down on October 2. Hester Peirce, who had been at the agency since January 2018, resigned to become a law professor at Regent University in Virginia Beach, Virginia. Peirce was a longtime outspoken advocate for digital assets. She even earned the nickname "Crypto Mom" from the cryptocurrency industry. Since early 2025, she chaired the SECs Crypto Task Force and was a big believer that markets and investors, not regulators, should determine the viability of a particular asset, whether digital or not. She called for sensible regulatory guardrails that allow investors freedom of choice to determine what was the best investment option for them.
But her departure from the agency comes just a month after the collapse of the Clarity Act in the Senate, a bill that would have created a regulatory framework for cryptocurrency. Without it, oversight of the industry remains murky, with the SEC and the Commodity Futures Trading Commission, the CFTC, having an unclear division of responsibilities. Following the bill's failure to pass the Senate, the SEC has moved quickly to propose new rules of the road for digital assets, including rules for the trading of tokenized securities and a new proposal covering how investment advisers should custody digital assets.
Peirce's departure leaves the SEC with just two members—Chairman Paul Atkins and Commissioner Mark Uyeda, both Republicans. The agency is supposed to have five commissioners, with three from the president's party and two from the minority party. But the two seats for Democrats have been empty since former Commissioner Caroline Crenshaw departed in January, and the administration has signaled little interest in filling either of those seats. Republicans reportedly have a leading candidate to fill the now-vacant Republican seat, but it's not clear when that nomination will take place—and it doesn't seem likely that the administration will nominate any Democrats to the other vacant seats, though that could change after the election if Democrats win control of the Senate. In the meantime, Atkins and Uyeda are expected to continue to push forward the administration's deregulatory agenda at the agency.
On my Deeper Dive today, I want to share a final preview of the midterm elections—what investors should be watching for, how the market might react, and what the various outcomes might mean for the policy agenda.
So let's begin with my outlook for what might happen on Election Day. In the House of Representatives, all 435 seats are on the ballot next month. Historically, midterm elections are horrible for the president's party. The party holding the White House has only gained house seats in a midterm election three times since 1906. Add on to that historical context the particulars of 2026—the president's low approval rating, high gas prices, an unpopular war in Iran—and it foreshadows a difficult atmosphere for the Republicans, who currently hold a slim 218-214 margin in the House, with one independent and two vacancies.
But the key development in the battle for control of the House has been the frenzy of redistricting and gerrymandering that has reshaped the playing field. That process began last year, when Texas redrew its congressional district lines to try to increase the number of Republicans in its House delegation. California countered by redrawing its lines to try to get more Democrats in the chamber. By the end of the process, nine states had drawn new lines for this November's elections.
The biggest effect of that effort was to dramatically shrink the number of competitive races across the country. The Cook Political Report, a nonpartisan, Washington-based organization that analyzes elections, ranks all 435 races on a competitiveness scale, from toss-ups to safe red seats and safe blue seats. As of October 5, they had 22 races rated as toss-ups and 21 more as "leaning" to one party or the other. In other words, just 43 out of 435 races are considered truly competitive. Those 43 races are the universe in which the majority will be determined.
Given the overall atmosphere, Democrats are heavily favored to win control of the House of Representatives next month. The real question is, by how much. Democrats are optimistic that a "blue wave" is shaping up that will allow the party not only to do well in those 43 most competitive districts, but perhaps even pick up some wins in seats in deeper red parts of the country, seats that President Trump won by 10 or more points in the 2024 presidential race. That may or may not happen, but it's looking increasingly possible that Democrats will emerge with a double-digit majority in the House. If Democrats have a strong showing on November 3, they could end up with a margin of perhaps 12 to 15 seats, and possibly a slightly larger margin than that.
Over in the Senate, it's a much tighter battle. There are 35 Senate seats that are up for election next month—22 currently held by Republicans, 13 currently held by Democrats. Republicans hold a 53-47 majority. That means that Democrats need to net at least four seats in order to capture the majority. If they net only three, then there will be a 50-50 tie. The vice president breaks ties, and J.D. Vance would ensure that the Republicans retain the majority.
So what's the path to the majority for the Democrats? Well, it starts with retaining the two most competitive seats currently held by a Democrat—in Michigan and New Hampshire. The Democrat senator in both states is retiring and both races are close, although the Democrat in each race has had a small but consistent advantage in the polls.
There has also been some recent polling showing that the Senate race in Minnesota is closer than expected. That's another open seat race because Senator Amy Klobuchar, a Democrat, is running for Governor.
If the Democrat loses any of these three races—Michigan, Minnesota or New Hampshire—the path to the majority becomes nearly impossible.
But if Democrats hold those seats, then they will need to flip the Senate seat in at least four red states—and there are a growing number of competitive races where Republicans are on the defensive.
The Democrats' best chance to flip a seat is in North Carolina, where the Republican senator is retiring. The Democrat, former governor Roy Cooper, has been ahead in the polls for months, and recently Republicans canceled some of the planned ads in the state. That's traditionally a sign that the race isn't considered winnable and that the party's resources are better spent elsewhere.
Then Democrats would have to flip three more seats in red states. At least five, and possibly more, are in play. Here are the key races to watch on Election Night.
First, Alaska. Alaska is a tricky state—it's a small population scattered across an enormous geographic area that makes it notoriously difficult to poll. It also has an unusual system known as ranked-choice voting. There are four candidates on the ballot, and voters rank them all in order of preference. If one candidate wins more than 50% of the first-choice votes, then they win. But if not, the counting continues with the candidate with the fewest votes eliminated, and the second choice is counted on those ballots whose first choice was eliminated. This continues until a candidate has a majority of the votes.
In an "only in Alaska" twist, two of the four candidates on the ballot are named Dan Sullivan—the current senator and a challenger. Both are Republicans, and that could be confusing for voters. Former Congresswoman Mary Peltola, the Democrat in the race, is a slight favorite—but it's such an unusual situation that no one really knows what will happen.
Iowa: With Republican Senator Joni Ernst retiring, this is a highly competitive race between Congresswoman Ashley Hinson, the Republican, and Josh Turek, a Democrat state representative with an intriguing back story. He has used a wheelchair since childhood and is a two-time gold medalist at the Paralympics in wheelchair basketball. Iowa's race has been complicated by frustration among farmers with the president over his easing tariffs to allow the import of 300,000 tons of foreign beef, as well as high diesel prices. The polls show a statistical dead heat. It's a true toss-up race that could go in either direction.
In Maine, Senator Susan Collins is the only Republican senator who represents a state that Kamala Harris won in 2024. Collins, seeking her sixth term, is locked in what might be the toughest race of her career against Troy Jackson, a Democrat who is a former president of the Maine State Senate. Collins, the most moderate Republican in the Senate, has tried to highlight her long career of bringing federal dollars back to Maine and her record of never having missed a single vote in her nearly 30 years as a senator. But if there is a blue wave type election, Collins may get swept up.
Then there is Ohio, where former Senator Sherrod Brown, a Democrat, is trying to return to the Senate after being ousted just two years ago. His opponent is Senator Jon Husted, a former lieutenant governor who was appointed to fill the seat vacated by JD Vance when he became vice president. The two are vying to fill the remaining two years of Vance's term. Whoever wins will have to run again in 2028 for a full six-year term. The race has seen more than $250 million in ad spending as the two candidates spar over issues like data centers and cryptocurrency. Brown has held a slight advantage in the polls in recent weeks, but this race is definitely too close to call.
Finally, perhaps the most intriguing competitive race from the Democrat perspective is in Texas. Texas has long been something of a white whale for the Democrats, who have tried for years to win a statewide election in the Lone Star State. It hasn't worked. Texas has not elected a Democrat to the Senate since 1988. This year's candidate, James Talerico, a state legislator, is trying to buck that trend. Talerico is a dynamic campaigner who has raised astonishing sums of money for his race. His opponent is Ken Paxton, the Republican attorney general in Texas, who beat the current senator, John Cornyn, in a bitter primary earlier this year, when he won the endorsement of President Trump. But Paxton is not known as a strong campaigner, and he has a lot of personal baggage. Talerico has been ahead in the polls, but, well, it's still Texas. This one is likely to come right down to the wire.
There are also some interesting polls showing more-competitive-than-expected races for Republican seats in Florida, Kansas, Mississippi, Nebraska, and South Carolina. If the Democrat pulls an upset in any of those states, it's a clear signal that it's a very big night nationally for the party, and the majority would be all but certain.
There are multiple plausible paths for Democrats through these races—and they are likely to only have to win three. But I don't think it's anything close to a slam dunk.
So my bottom line with less than four weeks before election day: I think there is an 80-85% chance that the Democrats capture the House of Representatives. But it's a true 50-50 toss-up as to which party will win the Senate.
One fascinating X factor that may come into play after the election is Senator John Fetterman, the iconoclastic Democrat senator from Pennsylvania. He has broken with his party on more votes than any other Democrat, and there is rampant speculation that he might switch parties or become an independent. If Democrats emerge from election night with a 51-49 margin in the Senate, then Fetterman will have enormous leverage over both parties. It's something to keep an eye on after the election.
OK, so that's what to watch for on Election Night as the two parties battle for control of Congress. But for investors, there's a bigger question. What could it all mean for the markets?
Well, first, let's examine how the markets think about the midterms generally.
I took a look at how the S&P 500® performed around every midterm election since 1974. Perhaps it's not surprising that the three months leading up to a midterm have typically been volatile but ended up basically flat—the average S&P 500 return from August 1 to Election Day in the midterm years since 1974 is just 1.7%, and if you remove an outlier year in 1982, it would be negative. Markets don't much like elections—they are a big source of uncertainty. And so the market has tended to drift in the run-up to an election. That's even true so far in 2026. Between August 3, the first day of trading that month, and October 2, the S&P 500 was up about 1.6%—right on the historical average for months heading into a midterm election.
But the important data is what happens after a midterm election. In the three months immediately following a midterm, the S&P 500 has averaged a 5.7% return since 1974.
And in the six months following a midterm, the S&P 500 is up an average of 12.4%—and it has been up six months after every single midterm since 1974.
What is this telling us? Markets do not care who wins the election. Markets care that the election is over.
Once the election is over and the uncertainty is cleared, market participants can assess the outcome and what the political configuration will be in Washington—and then make some educated guesses about the degree to which policy and politics could impact companies and the markets over the next two years. In 2026, divided government is the highly likely outcome for the next two years, and that's typically a recipe for gridlock. Markets generally don't mind political gridlock, as it tends to result in fewer market-moving developments coming out of Washington.
But it doesn't mean that there is no chance of market-moving policy and political decisions over the next couple of years. We've seen that President Trump's aggressive use of executive orders and even just his frequent use of social media to announce policy can move markets. Think about the initial tariff announcements in April 2025, which triggered a major market sell-off. Or the start of the war in Iran in February 2026, which was a key factor in the S&P 500 being down more than 4%in the first quarter of this year.
So what will the market be watching after the election? And what is the potential for agreement between Democrats and the president on, well, anything?
There's no question that the next Congress will have to deal with some major policy issues, regardless of what the outcome is on November 3. Topping that list is a looming fight over raising the debt ceiling, one of the most consequential policy debates for the markets.
In late summer, the Treasury Department announced that the national debt had crossed the $40 trillion line for the first time in the nation's history. It's a staggering, almost incomprehensible number. It also brought the nation closer to hitting the debt ceiling, the congressionally mandated cap on how much total debt the United States can accumulate. That level was set most recently by Republicans when they passed the One Big Beautiful Bill in the summer of 2025. That bill raised the debt ceiling by $5 trillion—to $41.4 trillion, a level that the country should hit by mid-2027.
If Democrats win the House, the Senate, or both this November, then a debt ceiling fight next year will be particularly tricky, as the Democrats would have to reach a deal with President Trump on a plan. Democrats would likely ask for significant concessions on policy issues they favor in exchange for their vote.
But doing so could risk a financial meltdown. Debt ceiling stalemates in recent years have resulted in market downturns, increased volatility, rising bond yields, downgrades of the U.S. credit rating, and even the risk of an unprecedented default. It's the issue for investors to pay the most attention to.
Republicans have raised the possibility of trying to address the debt ceiling as part of a Republican-only legislative package in the November/December timeframe, before the new Congress arrives in January. Doing so would make use of the same procedural maneuver, known as a budget reconciliation bill, that Republicans used last year to pass the One Big Beautiful Bill. It's a risky and highly uncertain maneuver, but it merits watching when Congress comes back to Washington.
If Democrats control the House and/or Senate, we also will likely be in for more tension around government funding, and the risk of a government shutdown will increase.
Congress will face its first government shutdown deadline before the newly elected Congress even takes office. The current agreement to keep the government open runs from October 1 through December 11, and the newly elected Congress won't take office until January. So the current Congress will have to return to Washington after the election to face that deadline, among a number of other policy challenges. But if Democrats win the House and/or the Senate in November, their willingness to compromise with Republicans on a government spending package is likely to be low.
A government shutdown in December can't be ruled out, but a more likely path is another temporary extension of funding into the new year, basically kicking the can down the road until the new Congress takes office. But agreeing to a funding deal between a Democrat-controlled Congress and the White House, if that's the configuration that emerges from the election, won't be easy either.
Markets tend not to react as much to government shutdowns as they do to debt ceiling fights. In fact, when 2025 saw the longest government shutdown in history at 43 days, the S&P 500 actually went up by 2%. But a government shutdown could add pressure to the already-volatile bond market, which has grown increasingly concerned about the level of debt.
Beyond the debt ceiling and a potential government shutdown, what else will the markets be watching after the election? There may be some areas where bipartisan compromise could happen. The issues that I mentioned earlier—legislation to make data centers foot the bill for increased utility costs and a ban on congressional stock trading are both widely supported across the two parties, and with election-year politics in the rearview mirror, both could find a path to an agreement.
Both parties are also eager to put a regulatory framework around cryptocurrency. The collapse of the Clarity Act just a few weeks ago was a setback, but I would expect leaders from both parties to take another run in 2027 at crafting a deal that could pass both chambers.
And retirement savings legislation is typically something that rises above partisan politics. Congress has passed two major retirement bills in the last seven years, and there are members of both parties interested in another one that could include things like automatic enrollment in an individual retirement account for workers that don't have access to a retirement plan through their employer.
Finally, one of the issues I expect to come up more and more frequently in Congress over the next couple of years is Social Security. Concern about the financial health of the program has hit the critical stage after the trustees of the Social Security Trust Fund projected that the program would be unable to pay out full benefits by the fourth quarter of 2032 if Congress does nothing to shore it up. The reason that has attracted attention is that the senators elected next month know that the deadline will come before the end of their six-year term.
I don't expect Congress to address the issue before the presidential election of 2028—but I do expect Congress to at least start the groundwork in the next two years for a bigger debate in 2029. And I expect the issue to be a major one in the presidential campaign over the next two years.
So where does all that leave investors? Well, here are my key takeaways:
First, chances are high that Democrats capture the majority in the House of Representatives, and they have about a 50-50 chance of capturing the Senate as well.
Second, while history suggests that markets tend to be relatively flat in the run-up to a midterm election, it is likely that volatility will continue as well. But while past performance is no guarantee of future results, history also suggests that markets move into positive territory soon after the midterms.
Third, a divided Congress, if that's the outcome, is likely to produce legislative gridlock. Yet big issues loom, including battles over the debt ceiling and government funding, that could have a market impact.
And finally, my most important takeaway is this: Remember that elections tend to be emotional events, and those emotions are a terrible mix with your investing decisions. Whatever the outcome on November 3—whether your choices win or lose—don't overreact by making sudden changes to your portfolio. Breathe a little and consult with your financial advisor before making any rash decisions.
Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. 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.
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- Follow Mike Townsend @MikeTownsendCS.
- Check out Schwab's Insights & Education for the latest commentary from Schwab experts.
- Follow Mike Townsend @MikeTownsendCS.
- Check out Schwab's Insights & Education for the latest commentary from Schwab experts.
In this election preview episode of WashingtonWise, host Mike Townsend offers his guide to the 2026 midterms, including the latest outlook for control of the House and Senate, the key races that could determine the balance of power, and why divided government is emerging as the most likely outcome. Mike goes in depth on the markets and midterms, including historical reaction to elections, where investors should consider putting their focus, and how major policy battles could shape 2027.
Mike also shares the latest from Washington, including the Senate's failure to move forward on data center legislation and a congressional stock trading ban, the dramatic expansion of Trump Accounts, and changes at the SEC.
WashingtonWise is an original podcast for investors from Charles Schwab.
If you enjoy the show, please leave a rating or review on Apple Podcasts.
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