Special Election Edition: Avalon's Bill Stone

Summary

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WSJ Your Money Briefing: Special Election Edition with Avalon’s Bill Stone

Date: November 7, 2018
Host: Charlie Turner (Wall Street Journal)
Guest: Bill Stone, Co-Chief Investment Officer, Avalon Advisors

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Episode Overview

This special episode, aired just after the 2018 U.S. midterm elections, explores the immediate impacts of a newly divided Congress on the financial markets and on major policy areas including taxes, regulation, trade, healthcare, energy, and interest rates. Charlie Turner interviews Bill Stone to break down what investors and consumers should expect with Democrats controlling the House and Republicans retaining the Senate.

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Key Discussion Points & Insights

1. Market Reaction to the Election Results

• No Surprises is Good News:
  Bill Stone notes Wall Street’s preference for predictability, highlighting that the anticipated split Congress reduced uncertainty for investors.
  • Quote:
    "Wall Street really likes not having a surprise and removing one uncertainty out of our long list of uncertainties." (Bill Stone, 01:16)
• Republican Gains in Senate a Bonus:
  The unexpected Senate gains for Republicans further decrease the likelihood of any tax cut rollbacks.
  • Quote:
    "There's also less a chance or essentially… no chance of any rollback in any of the tax cuts that we've had." (Bill Stone, 01:27)

2. Expectations of Congressional Gridlock & Volatility

• Legislative Challenges for Trump:
  A Democrat-controlled House will make it harder for President Trump to pass key parts of his agenda, potentially contributing to market volatility.
• Trade Policy Uncertainty (Especially with China):
  Stone emphasizes tariffs and trade policy—particularly with China—as a lingering unknown for the markets.
  • Quote:
    "The maybe bigger item… is the tariff side of things and… China and how he's going to really react on that side. He sent out a tweet already this morning… focus back on that." (Bill Stone, 01:57)

3. Tax Policy, Debt, and Deficit

• Unlikely Tax Changes:
  Despite calls from Democrats, major changes or rollback to corporate tax cuts are improbable given the Senate composition and the House’s narrow majority.
  • Quote:
    "They may still try and do some of those things on the tax side… but… it's not going to go anywhere." (Bill Stone, 04:04)
• Debt Ceiling Showdown?:
  Raising the debt ceiling could be a point of negotiation or contention in 2019, reminiscent of past standoffs.
  • Quote:
    "…we do have to raise the debt ceiling in 2019. Do the Democrats do what the Republicans did before and really try and… get something out of President Trump to raise that debt ceiling?" (Bill Stone, 04:30)
• Deficit and Infrastructure:
  There may be bipartisan appetite for infrastructure spending, but neither party is likely to create a marked change in the country’s deficit trajectory.

4. Regulation and Industry Sectors

• Deregulation Trends to Pause, Not Reverse:
  With control of the Senate, the momentum toward deregulation in areas such as finance, energy, and autos is expected to stabilize but not reverse.
  • Quote:
    "…some of the biggest parts of that deregulation might be behind us. But I do think…there's going to be a whole lot of increase again there." (Bill Stone, 05:36)
• Healthcare and Drug Pricing:
  Attention may shift to healthcare investigations, particularly drug pricing—a rare area of bipartisan concern.
  • Quote:
    "Are we going to look at drug pricing? I think that's a place that will probably get looked at…" (Bill Stone, 06:00)
  • Drastic measures like widespread price controls are improbable due to Senate Republicans’ majority.

5. Healthcare Legislation (Obamacare & Medicare for All)

• Major Reforms Unlikely:
  With split control, significant changes to Obamacare or introducing Medicare for All are unlikely.
  • Quote:
    "You just can't expect any significant rollback on Obamacare… Hard to see a huge move in Medicare for all…" (Bill Stone, 06:40)
• State-Level Momentum:
  Some state ballot initiatives related to healthcare did pass, indicating ongoing public interest in reform at the state level.

6. Sector Spotlights

• Energy Sector Relief:
  The energy sector saw gains following the defeat of a Colorado ballot initiative that would have restricted drilling.
  • Quote:
    "Energy… was pretty strong this morning and… that's due to the Colorado initiative… being defeated." (Bill Stone, 07:09)

7. The Federal Reserve and Interest Rates

• No Direct Impact from Election:
  Stone expects no major change to the Fed’s independence or monetary policy path post-election.
  • Quote:
    "It's tough to say that this election… had much impact on that. I think President Trump is likely to continue to use his… Twitter pressure on the Fed to not raise rates as much." (Bill Stone, 07:40)
• Fed Independence Assumed:
  The central bank is expected to ignore political pressure and continue acting based on economic data.
  • Quote:
    "I don't expect that to change. But… I don't necessarily expect the Fed to listen either." (Bill Stone, 08:00)

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Notable Quotes & Memorable Moments

• On Wall Street’s Reaction:
  "Wall Street really likes not having a surprise and removing one uncertainty out of our long list of uncertainties." (Bill Stone, 01:16)

• On Tax Cuts:
  "There's also less a chance or essentially… no chance of any rollback in any of the tax cuts that we've had." (Bill Stone, 01:27)

• On Future Volatility:
  "We haven't ended that side. So I think that's one thing the markets will be watching closely." (Bill Stone, 02:25)

• On Congressional Dysfunction and Debt Ceiling:
  "…we do have to raise the debt ceiling in 2019. Do the Democrats do what the Republicans did before and… get something out of President Trump to raise that debt ceiling?" (Bill Stone, 04:30)

• On Healthcare Policy Deadlock:
  "You just can't expect any significant rollback on Obamacare… Hard to see a huge move in Medicare for all because again you've got the Senate controlled by the Republicans." (Bill Stone, 06:40)

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Timeline of Important Segments

• 01:16 – Bill Stone on Wall Street’s relief at the anticipated outcome
• 01:57 – Uncertainty remains around tariffs and China trade policy
• 04:04 – Stone outlines the impossibility of major tax changes
• 05:36 – Discussion on deregulation and specific sectors
• 06:00 – Focus on potential drug pricing reforms
• 06:40 – Prognosis for Obamacare and Medicare for All in a divided Congress
• 07:09 – Energy sector impact from Colorado’s ballot measure
• 07:40 – Relationship between Congress, President Trump, and the Federal Reserve

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Conclusion

This episode provides a nuanced, expert view of how financial markets and US policy directions respond to a divided government. Bill Stone offers calm, pragmatic takeaways: broad legislative changes are unlikely, and markets appreciate the reduction in uncertainty. Trade—particularly with China—and the looming debt ceiling debate are called out as the biggest areas to watch. On regulation, taxes, and healthcare, incrementalism and gridlock are likely to rule the day.

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Transcript

[A]

Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP, Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ.

[B]

With a special youl Money Briefing. I'm Charlie Turner in New York for the Wall street journal. The 2018 midterm elections are over and the result, as expected, is a divided Congress. The Democrats have regained control of the House while the Republicans added to their margin in the Senate. How will Wall street react to a split Congress and what does the election mean for issues such as taxes, regulation and spending? Bill Stone is co chief investment officer at Avalon Advisors and he joins us from Houston. Bill, as we speak, the markets are up post election. That doesn't mean stocks will stay up given the volatility that we've had. Does Wall street like a split Congress?

[C]

I think Wall street really likes not having a surprise and removing one uncertainty out of our long list of uncertainties. So I think that's what we did accomplish. As you mentioned, the split Congress was the consensus going in and we got that. I think the other side was because the Republicans also picked up some seats on the Senate which was I would argue a surprise. I think there's also less a chance or essentially let's call it no chance of any rollback in any of the tax cuts that we've had.

[B]

Might we see some volatility tied to uncertainty about whether President Trump can get his agenda passed now that we have a Democrat controlled House? After all, bills start in the House.

[C]

Yes. I mean, I think most would expect less chance of getting some things passed. I think probably the maybe bigger item, which I still don't think we have much real insight into yet, is the tariff side of things and let's just say it, China and how he's going to really react on that side. He sent out a tweet already this morning talking about that he was going to focus back on that. Does that mean he goes for a short term deal there? He still has room to work there. But I think that's a part that, you know, as you're thinking about volatility. We haven't ended that side. So I think that's one thing the markets will be watching closely.

[B]

I'm sort of confused about that bill. President Trump by executive order can enact tariffs but as far as trade deals with Mexico and Canada, the European Union, China, Japan, he still needs congressional approval for that and that involves the House or he may get support from the House. True.

[C]

No, I meant more really focused on the China side of things is how far does he take the tariff situation before he perhaps goes for a short term deal? Because I do think the one thing to keep in mind, and I think maybe this is also part of the cheer on Wall street is that once the midterms are over, really most politicians turn and certainly presidents turn to thinking about the reelection. Right. And if you're a president you are concerned about making sure that the economy is doing well, that is going to drive a lot of your approval. And, and I think that's where perhaps you see the pivot on him being willing to cut some sort of a deal with China in the end and kind of take that off the table. But again, that's one we don't know yet. That's something we're going to have to watch.

[B]

I'm speaking with Bill Stone, he's co chief investment officer at Avalon Advisors. And you're listening to your money briefing from the Wall Street Journal. Bill, what does the election result mean for issues such as taxes? Will Democrats in the call for, for instance, raising the corporate tax and what about tax cuts, the deficit, the debt?

[C]

Well, I mean, I think you really can say, especially with the Republicans picking up more seats in the Senate and really the Democrats having a really pretty narrow lead in the House or narrow majority there, they may still try and do some of those things on the tax side in terms of raising taxes, rolling back. But let's just be honest, it's not going to go anywhere. So that's not going to happen. I think probably if there's one thing you need to, you know, if we're going to spend our time being concerned about something, we do have to raise the debt ceiling in 2019. Do the Democrats do what the Republicans did before and really try and, you know, get something out of President Trump to raise that debt ceiling? So I think that's the spot maybe to watch on that side. If you're thinking about, I'll say taxes or those pieces, the thought is, well, where do they come together in terms of the deficit? There is a possibility that they can get something done on infrastructure. I'd say I wouldn't be too worried about that making some sort of massive change in the debt because we even saw it under President Obama there was a focus on trying to do infrastructure. But the fact is it's hard to just because of the scale to get enough done, your capacity constrained there. So I'm going to say I don't think they can spend enough money to make some sort of trend change or some sort of big change in the deficit.

[B]

What about the all important topic of deregulation? What does the election mean for that? You know, financial, energy, autos, I think

[C]

you can say I don't expect that really to be rolled back obviously because the Senate confirms a lot of the president's picks. I would think in the end you still should see some movement in that direction. You know, maybe we have to say some of the biggest parts of that deregulation might be behind us. But I do think you don't have to really say there's going to be a whole lot of increase again there now again are we going to have some more maybe investigations into things Will we look at I'm going to pick on health care or talk about health care. Are we going to look at drug pricing? I think that's a place that will probably get looked at because even the president, this is not necessarily a Republican positive on that. But in terms of the president has said he wanted to look at drug pricing. I think most believe and you know we've seen healthcare act pretty well today that because you got the more majority of Republicans in the Senate, even though the president might be for it, you probably don't get the most drastic version of some sort of price controls on drugs.

[B]

What about other healthcare issues, bills such as Medicare for all, Obamacare?

[C]

I mean I think the one part of it is and I think this is the other reason why you're seeing some better movement out of the healthcare. You know, you just can't expect any significant rollback on Obamacare on the aca. Hard to see a huge move in Medicare for all because again you've got the Senate controlled by the Republicans. But do you see some movement that way? We saw that on some of the state ballots. So I think three out of four states that had that on the ballot did pass that. So there was some movement there. I think the other side I'm going to switch off of health care. The other I guess sectors we're kind of talking about sectors impacted energy. So energy last I looked was pretty strong this morning and I think I'll attribute that to the Colorado initiative initiative being defeated. So you know there won't be I guess a stop to really drilling in Colorado.

[B]

And Bill, what about interest rates, specifically the Fed. What does a split Congress mean as far as Congress's and Trump's relation with the Federal Reserve.

[C]

Yeah, I mean, it's tough to say that this election, to my view, had much impact on that. I think President Trump is likely to continue to use his, I guess, Twitter pressure on the Fed to not raise rates as much. I just look at that as a function of again, I mean he's going to be thinking like any politician thinking about getting reelected, trying to make sure the economy is as strong as it possibly can be. So I think he thinks that way. I don't expect that to change. But again, I don't necessarily expect the Fed to listen either. Right. I don't know that it necessarily shows up as anything. I always hope the Fed is looking to, and I think like all of us, to do the best job they can and they're going to listen to the markets and the economy and make the changes they think are necessary.

[B]

I've been speaking with Bill Stone. He's co chief investment officer at Avalon Advisors in Houston. Bill, thanks a lot.

[C]

Thank you very much.

[B]

And that's your money briefing. I'm Charlie Turner in New York for

[A]

the Wall Street Journal deal Replaces fragmented Payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e e l.com WSJ.