Republican Committee Control Presents “Headline Risk” for ESG, Says Investment Bank

Stifel, a wealth management and investment bank company, hosted a webinar today in which they discussed the likeliest outcomes of the upcoming mid-term elections and their impact on financial markets.

Brian Gardner, Stifel’s chief Washington policy strategist, said that that the Republicans are “highly likely” to take the House and “increasingly likely” to take the Senate. He explained that the most likely scenario is one in which the Democrats keep the Senate but lose the House, an outcome with a 50% chance to occur in his estimation. He gave the chance of Republicans taking both houses a 40% chance of happening.

This prediction is consistent with the both the House and Senate maps up on Real Clear Politics, a polling aggregator, as of today.

Though the midterm elections normally favor the non-incumbent party, only approximately a third of Senators are up for re-election in any particular election, and this year has a favorable map for Democrats, according to Gardner.

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Gardner warned that if the Republicans take either house, organizations that they consider representatives of “woke capital,” a derogatory phrase often used to refer to ESG investment strategies, will likely “find [themselves] in committee hearings.” This line echoes a similar remark made by Neil Simon, the vice-president for government relations at the Investment Adviser Association, at a conference last month in which he said that Republicans should and likely would use Congressional hearings as a tool to distract SEC Chairman Gary Gensler from pushing for new regulations, if they are able to take either house of Congress.

Gardner went on to say that such hearings carry a “headline risk,” for firms whose executives are called to testify, but a low risk of actual policy changes, at least in the short-term and on the federal level. He also said in reference to Chairman Gensler that Republican-led committees “can browbeat him all they want” but they are unlikely to see a change or slowdown in policy at least until the 2024 elections since the executive branch controls new regulations.

It is on the state-level that firms with ESG strategies are most at risk for policy change. Specifically, Republicans will likely look to shift state pension fund investments away from certain companies, especially those that they believe are avoiding investment in firearms and fossil fuel firms. He explained that state governments have more tools “to push back on woke capital.”

Stephen Gengaro, the managing director of oilfield service and equipment stocks at Stifel, explained that ESG strategies are believed to increase the cost of capital for fossil fuel firms because it limits the number of investors that are willing to make investments in them.

Tags: Congress, ESG, SEC

They usually go up after the vote, with the uncertainty over. But maybe not this year, warns Schwab’s Liz Ann Sonders and some other Wall Street savants.

The historical stats tell us that stocks do well after midterm elections. Reason: no more uncertainty about who is in charge of what part of the government. But despite such balming sentiments, there’s a discordant buzz that all the bad news – strong inflation and a highly anticipated 2023 recession – will counteract political history.

First, the happy side, courtesy of historical precedent. Stocks have gained an average 2.7% in the October of midterm years since 1950, according to an analysis by George Smith, a portfolio strategist at LPL Financial. The fourth quarter has long been the best, and especially in a midterm year, with the final period averaging 6.5%. What’s more, one year after the election, stocks had advanced an average 15%. Year 3 of a new president’s term (that would be 2023 here) was the best of any.

What about when a midterm election overlapped a bear market, which we certainly are in now? It’s also good, going back to 1945, per a report from Sam Stovall, senior investment strategist at research shop CFRA

The S&P 500 (and its predecessor) logged an ultimate bottom in October four of five times, and recorded an average gain of 5.6% for the month, going up 60% of the time, Stovall says. After that, the index climbed an average 6.2% through December 31, rising in price 100% of the time.

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Well, maybe that was then. Some financial thinkers don’t buy that we are destined to follow the rosy past, with so much having gone wrong in the world.

To Liz Ann Sonders, chief investment strategist at Charles Schwab, a host of economic and geopolitical troubles have a good chance of overwhelming the historical pattern. “The combination of high inflation, the war in Ukraine, and a lingering pandemic has already made this cycle unlike prior midterm years,” she writes in a report. “With so many other forces at play in the market, I wouldn’t put much weight in historical midterm-year performance.”

And it all is leading toward what Americans dread most: the R word. “Today, it is inflation, the Fed’s response to elevated inflation, and resulting risk of recession, that will be what determines the market’s direction over the coming quarters,” Seema Shah, chief global strategist at Principal Asset Management, wrote in a recent research note.

“A major question now is whether higher wage costs are hurting the bottom line for companies,” says Rob Haworth, senior investment strategist, U.S. Bank Wealth Management, in a research note. “Companies have been able to maintain earnings levels to date because they could push through price increases,” he goes on. “Can they continue to do that? It will tell us a lot about how earnings hold up through the year.”

One outcome of the election – divided government, with a Democratic White House and the GOP in control of one or two congressional chambers – could end up a boon. “The market tends to like gridlock,” Nadia Lovell, senior U.S. equity strategist at UBS Global Wealth Management, told Reuters. “I think it’s fair to say a split government is what investors right now expect and are positioned for.”