Market Commentary

• We don’t expect the midterm election outcome to change our investment outlook. Economic growth, earnings,inflation, and interest rates should remain more important market drivers than which party controls Congress.
• We would resist making major portfolio moves based on the election outcome alone. Instead, we continue to favordiversified portfolios positioned around durable economic and investment trends.

With the midterms fast approaching, investors may be wondering whether they should make changes to their portfolios before Election Day on November 3. Our short answer: probably not.

That’s not to say elections don’t matter. As we detail in our October 15 Policy, Politics & Portfolios report, depending on which party controls Congress, we could see different proposals tied to spending, energy, health care, and regulation. For example, Affordable Care Act (ACA) subsidies and food assistance benefits remain areas of significant policy debate. But major policy changes may be harder to accomplish than campaign headlines suggest. Congressional majorities are likely to remain narrow under any outcome, and disagreements between and within the parties should limit sweeping legislation.

More importantly, we don’t think the election results change the broader economic story driving markets. Regardless of who controls Congress, we expect other forces to remain the bigger drivers of economic growth. These include artificial intelligence (AI)-related investment, consumer resilience, energy prices, and Federal Reserve policy. Our economic outlook is unchanged across the three possible election scenarios: a split Congress, continued Republican control, or Democratic control of Congress under a Republican president. History supports our view: Since 1979, average two-year real economic growth has been nearly identical under single-party congressional control and under divided chambers.

The same idea applies to markets. Elections may create winners and losers in areas such as defense, energy, health care, housing, and AI infrastructure. But for the broader stock market, we believe economic growth, company earnings, inflation, and interest rates will matter much more.

No matter which party or parties control Congress, one area to watch is government borrowing. Federal deficits have widened regardless of the makeup of Congress. In recent decades, disagreements in Washington have centered more on how money should be spent rather than whether it should be spent. Continued deficits mean more Treasury borrowing, one of several factors we expect to keep longer-term interest rates elevated through 2027.

So, what should investors do? We would resist making major portfolio moves based on the election outcome alone. Our guidance is designed to participate in durable trends and manage policy-related volatility. We favor U.S. Large Cap Equities, short-term taxable fixed income, and Commodities while remaining unfavorable on long-term taxable fixed income.

Bottom line: Take political views to the polls, not to your portfolio. Elections may not always produce majorities capable of making big changes that affect markets. We believe staying diversified and focused on the larger economic trends remains the more disciplined approach to long-term investing.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns and does not guarantee profit or protect against loss in declining markets.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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