A New Flavor of Gridlock

As always, our political commentary is intended to be nonpartisan. We favor neither party nor any individual politician, and neither do markets. We assess developments solely for how they may impact markets and investments.

America has a new president, which means it's time for everyone to pin their wildest hopes and fears on a one-man walking Rorschach test: Some see the sun rising, some setting and still others see a light through fog, which could be the sun or an approaching train. Many anticipate Republicans' control of the executive and legislative branches means major changes will swiftly come a-knocking-either boosting or hurting stocks, depending on one's biases and opinions. But legislative risk (or opportunity, we guess) isn't as high as many presume, as a new flavor of intraparty gridlock should keep President Trump's pen quiet. This should be welcome news for stocks, which dislike the potential for radical change and thrive on gridlock.

On paper, Senate math slightly favors the GOP, 52 seats to 48, and it is true Trump has the largest congressional majority of any newly elected post-war Republican president. But those 52 Republican senators are not a uniform, Trump-supporting bloc. Eleven never endorsed him. Many have openly denounced his plans and initial executive orders. The potential for defection is high, and it would take only three to quash a bill.^[i] Republicans also lack the 60 votes needed to overcome the filibuster, so they'll need Democratic allies to pass controversial policies. Anything that does squeak through will likely be diluted from what people envision today.

Extraordinarily popular presidents are good at getting Congress to fall in line, but Trump lacks political capital. His initial approval rating is 45%-significantly below all other presidents from Truman onward, making him the most hated modern president.^[ii] His initial disapproval rating is four times the average of the last nine presidents. Lawmakers therefore have little incentive to fall in line and back Trump on unpopular legislation-too risky for their own prospects. After all, 2018 is less than two years away, and an incumbent's goal is always to win re-election.

The effort to "repeal and replace" the Affordable Care Act (ACA) provides an early look at the roadblocks Trump likely encounters. It was the GOP's flagship campaign pledge-with near-uniform support-yet the effort is already floundering, and not just because Democrats are putting up a fight.

Congress did cross one hurdle a couple weeks ago, passing a budget that theoretically enables them to defund the ACA without a filibuster. But that doesn't guarantee said defunding actually happens. Even if it does, the law remains in place-personal mandate, employer mandate and all the rest. The actual repealing and replacing is much more difficult, and Republicans haven't unified around one approach. Some-including Trump-want to simultaneously repeal and replace the ACA in short order. Others want to do both in one fell swoop, but take more time. Still others wanted to pass a repeal law now that takes effect later, once they hash out the replacement. Several Republican governors oppose moving too quickly, which matters, as states are big players in the implementation. Meanwhile, voter support for the ACA is rising, with only 30% favoring a wholesale repeal (down from 40% in November) and 56% preferring some tweaks. The likelihood this moves swiftly is exceedingly low.

There are plenty of other places where intraparty gridlock could easily stall or neuter Trump's plans. For example, Trump campaigned on a $1 trillion infrastructure-focused fiscal stimulus program-something Congressional budget hawks aren't thrilled about. Trump already trimmed the target amount by nearly half, to $550 billion, but this may still face roadblocks. Intraparty opposition to prescription drug price caps or Medicare negotiation is high. Immigration policy is a political minefield. Taxes, too. President Trump also favors a simpler corporate tax code with lower rates, which lawmakers tend to shy away from once they realize it means closing their constituents' favorite loopholes. If we didn't see "grand bargains" when Congress and the president had more goodwill, it's difficult to imagine them miraculously happening now.

Even on trade, where the president wields more authority, big change isn't a given. Mike Lee (R-UT) introduced a bill to curb the president's trade authority last week.^[iii] Even without that, most sweeping new tariffs likely require legislation, and there is significant Republican opposition. John McCain (R-AZ), John Cornyn (R-TX) and Ben Sasse (R-NE) spoke out against protectionism and new tariffs this week. Representatives of constituencies where trade brings jobs won't cave easily.

Swamps are difficult, if not impossible to drain. Those who try generally end up stuck in the quagmire. The same probably happens to Trump. Rhetoric and jawboning might still affect short-term sentiment towards Health Care or other stocks. But the sort of fundamental change that would materially change the outlook for a given sector requires legislation, which seems set to get stuck in the morass. So whether you cheer or fear his proposals, he probably accomplishes less than envisioned.