Dear Readers,
Do you remember Andy Rooney from 60 Minutes?
When I was a kid, I thought he was a grumpy old man.
Now I’m the age he was when I first started watching him.
How crazy is that?
So today I’d like to be a little bit Andy Rooney and editorialize.
I want to share some thoughts on how I think this election will impact the markets over the next twelve months.
Gridlock Is the Best Outcome
As I said last month, midterm elections tend to be very good for the economy and the stock market.
And gridlock is the best outcome of all.
It’s the outcome I personally like.
It’s the outcome our Founding Fathers built into the system.
They designed it so you wouldn’t get big movement unless there was a real break, left or right.
So what can we expect?
When you have a Republican White House and a Democratic Congress, history says stocks rally and yields fall.
Over the following six months, stocks have risen every single time, averaging about 15.7%.
The 10-year yield has dropped by an average of about 25 basis points.
Does that guarantee it happens again?
No.
But that’s what the history says.
Inflation Decides Elections
The second thing we learned is that inflation really matters.
Inflation toppled Biden and the Democrats.
This week it cost the Republicans.
The Democrats finally dialed in a message, and they made it about the economy.
It’s the economy, stupid.
No matter what anyone said about them, they kept saying one thing: I’m here to focus on the cost of living for average Americans.
That message works.
And it might make Washington serious about fighting inflation once and for all.
If inflation keeps knocking people out of office, they might finally deal with the root causes.
That would be very good for us.
A Bad Week for Crypto and Prediction Markets
I would not want to be crypto or a prediction market this week.
The crypto industry spent about $40 million in 2024 to unseat Sherrod Brown, the Democratic senator from Ohio.
They spent another $46 million on Tuesday.
And he could end up with oversight of the CFTC, the small agency that supervises many crypto assets and prediction markets.
I think the Clarity Act is in trouble.
You know my feelings on crypto.
I’m not a big fan.
I understand stablecoins, because moving dollar-backed currency across borders has a real benefit.
I understand blockchain.
But I don’t understand Bitcoin.
I don’t see the inherent value.
It doesn’t make transactions faster, cheaper, or better, which is the standard for judging this kind of thing.
All it adds is cost and friction.
And I don’t understand the economic benefit of any other cryptocurrency that doesn’t work as a stablecoin.
I think it’s gambling.
As an American, I’m not right or left.
As a historian, I care about the health of the Republic.
I like it when Democrats win, and I like it when Republicans win.
I like a healthy electorate that participates, and a government that can hear the voice of its people.
I also want regulation to stay low.
I like every generation to raise up its own wealthy, because that means opportunity is still alive in this country.
Low regulation and low barriers to entry are a very important sign.
God forbid we become like Europe.
Data Centers: Winners and Losers
Now data centers.
Think Texas.
Texas went blue, basically.
That’s a big reason a lot of the hyperscalers rallied.
If the data center build-out slows, the Mag Seven spend less cash doing it.
Maybe the build-out stretches to seven years instead of four, or five years instead of three.
If that happens, their cash flow stops being so suppressed and starts to normalize.
That’s why those stocks went higher.
The flip side is that it crushed the NeoClouds like CoreWeave and Nebius.
Their business models are so debt-funded that they bet everything on the build-out happening at pace.
Any slowdown hurts them.
It punished semiconductor companies too, many of which are valued on a super fast build-out.
Those earnings don’t go away.
They just get earned over five years instead of three.
The big problem for me is that China has been exploiting our divisions on data centers.
This is the Great Game, the geopolitical competition over who gets ahead in AI.
China and Russia run meme farms and information warfare to divide us.
They want to slow us down by turning a federal issue into a state-by-state fight.
But the people have spoken, and that’s where we are.
Healthcare Wins
I think healthcare wins.
With the change in Congress, there will be budget negotiations.
If the Democrats are smart, they’ll stay focused on the economy, like the Blue Dog Democrats did when I was growing up.
They’ll focus on healthcare, Medicaid, and SNAP spending, and they’ll have leverage to negotiate with the president.
Going after Trump instead would be a mistake.
And ironically, if they added those programs back, it would create stronger economic growth.
The Bottom Line
Having had a couple of days to process the results, here’s my take.
The broader economic outlook remains intact.
The AI megatrend remains intact.
And I’m very happy with divided government.
I grew up learning that the less you hear from those people, the better.
Just let us do our business and stay out of the way.
They’ll keep each other occupied for a long time.
The more they focus on each other, the more we get to focus on business, without the heavy hand of government in everything we do.
That’s why the market rallies on gridlock.
The founders designed a system to do exactly this.
We don’t want too much influence from the left on the economy, and we don’t want too much from the right.
A lot of us are centrist, maybe center right.
Some are ultra right and some are ultra left, and that’s fine.
We have a democracy for a reason, and I’m glad it spoke.
There are winners, like healthcare.
There are losers, like prediction markets, crypto, and data centers.
Maybe we get inflation under control.
But net, the broad trade is intact.
It won’t be smooth sailing.
But we have the wind at our back with this economic growth.
Have a wonderful weekend.
God bless you.
God bless America.
I’ll see you on Monday.
“The Buck Stops Here,”
P.S. Politics can slow the data center build-out, but Democrats and Republicans can both agree on one thing. If we as a country are going to compete in AI with the rest of the world… We’re going to need this.
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Written by Dylan Jovine