A Country Divided

 

“Our country has never been more divided.”

And Always Has Been!

I’d like to give attribution to the quote above, but so many people have been saying it lately that attribution is impossible.

As we approach a divisive and acrimonious midterm election on Tuesday, let’s see what the data says about divisions within our country and their likely market responses.

First, it’s probably obvious that most Republicans and Democrats are deeply divided on the key issues of our time. [i]

 

 

The division is so severe that Republicans and Democrats can’t agree on something as fundamental as what creates success in our society. [ii]

 

 

As a society, we’ve become so partisan that it’s become difficult to agree on the relative strength of our current economic expansion, as well as prospects for the future. [iii]

 

 

Think about wage growth for a minute.  According to Axios, Americans are enjoying year-on-year wage gains above 3 percent for the first time in over a decade.  On top of that, September marked the 97th consecutive month that the U.S. economy created new jobs, an all-time record, according to Axios. [iv]

 

 

When you take a step back, you’ll likely realize we’ve always been divided, and probably always will be.  Here is my list of critical divisions, along with some anecdotal factoids:

• American Revolution – 15% to 20% of the population were loyalists to the British Crown [v]
• American Civil War – This is the epitome of our divisive nature with 620,000 Americans dead due to our divisions on economic, social, and racial issues [vi]
• Watt’s race riots, Kent State, Vietnam War protests, and the list goes on!

Here are the ten largest riots in U.S. history that were driven by critical divisions within our society: [vii]

1. Watt’s Race Riots (August 11-16, 1965) – 34 deaths and 3,500 arrested due to racial segregation and police brutality
2. Detroit (#1: June 20-22, 1943) – 34 deaths and 1,800 arrested due to racial tensions and European immigrants during WWII
3. New Orleans (July 30, 1866) – 44 deaths; black freedom marchers marched against the Confederate military for black liberties
4. Detroit (#2: July 23-27, 1967) – 43 deaths, 7,300 arrested, and 2,000 buildings destroyed during race riots due to police brutality
5. Memphis (May 1-3, 1866) – 48 deaths driven by the division and competition between recently freed blacks and Irish immigrants vying for the same economic, political, and social power
6. Los Angeles (April 29-May 4, 1992) – 63 deaths due to racial tensions between Korean and black communities after the Rodney King incident and subsequent acquittal of LAPD officers
7. Manhattan (#1: July 12, 1870 & 1871) – 70 deaths driven by the long-standing division between Irish Protestants and Catholics
8. Tulsa (May 31-June 1, 1921) – 39 deaths (or 300, depending on the source used) driven by racial tensions between the white mob and the African-American Greenwood District
9. Atlanta (September 22-24, 1906) – 25 deaths driven by race riots due to local government corruption
10. Manhattan (#2) Draft Riots (July 13-16, 1863) – About 120 deaths driven by the economic division between Manhattan’s wealthy, who could buy their way out of military service, and the poor immigrant population of mostly African-American and Irish who could not

If you don’t like my curated list, just look at Wikipedia’s list of major events that exemplify the division in our country.  Click here if you can stomach a look. [viii]

Maybe American’s just don’t get along, or perhaps we are just rebellious and disagreeable by nature.  Perhaps our founding fathers knew this and made the American presidency relatively weak by forming a representative republic. Or, perhaps, that’s why you need an extraordinary consensus to get anything passed through this complex government we are blessed to have.

The bottom line is that in my opinion, we are divided and always have been.  So, regardless of which party wins control of the House and Senate, we can expect that not much will happen.  Just consider the midterm elections by the numbers chart below, courtesy of Morgan Stanley research. [ix]

 

 

If there is a split in control of the legislature, nothing is likely to get done for two reasons:

1. The House will have such a small margin for the prevailing party that legislation will have to be centrist.  It’s going to take Democrats and Republicans to agree on the margins.  Add to that the fiscally conservative Freedom Caucus with 33 members who are not likely to sign onto any massive, unfunded spending bills… and nothing gets done. [x]
2. The Senate is projected to have 48 Democrats after midterm elections. With five Democratic senators (Sen. Cory Booker, Sen. Elizabeth Warren, Sen. Bernie Sanders, Sen. Kirsten Gillibrand, and Sen. Kamala Harris) potentially running for president, they’re not likely to give Trump any victories.  Again, nothing gets done. [xii] [xiii]

Yes, I predict Americans will remain deeply divided, as we have been since our founding.  The great gift of our founding fathers – our check-and-balance system of government – will likely continue to prevail unless we face a crisis or come together with overwhelming good ideas and consensus.

The good news about all this is that U.S. equity markets tend to do well after mid-term elections. [xi]

 

 

That’s right! One year after midterm elections, the S&P 500 rises, on average 15.1 percent; twice as much as in non-election years. [xi]

So when we look into the American mirror and see ourselves, at least we know all our progress and all our achievements are probably born from the fact that we rarely agree on anything.  Perhaps the disagreements are what fuel our passions and creativity to achieve more, want better, and work harder.

Maybe the competition for ideas that are born out of our political system is what makes us great.  That might just be the ethos our system of governance creates.  At least the equity markets might think that.

If you have questions or comments, please let us know.  You can contact us via Twitter and Facebook, or you can e-mail Tim directly.  For additional information, please visit our website.

Tim Phillips, CEO, Phillips & Company

Robert Dinelli, Investment Analyst, Phillips & Company 

 

References:

i.            http://www.people-press.org/2018/10/04/2018-midterm-voters-issues-and-political-values/
ii.           http://www.pewresearch.org/fact-tank/2018/10/04/partisans-are-divided-over-the-fairness-of-the-u-s-economy-and-why-people-are-rich-or-poor/
iii.          http://www.pewresearch.org/fact-tank/2018/09/28/americans-are-divided-on-security-of-u-s-economic-system/
iv.          https://www.axios.com/global-budgets-loosen-up-amid-fiscal-sunshine--6415c5e1-e5cc-446e-bbbe-84ad1ffe8379.html
v.           https://en.wikipedia.org/wiki/Loyalist_(American_Revolution)
vi.          https://www.battlefields.org/learn/articles/civil-war-facts
vii.         https://www.realclearhistory.com/articles/2018/05/02/10_deadliest_riots_in_us_history_302.html
viii.        https://en.wikipedia.org/wiki/List_of_incidents_of_civil_unrest_in_the_United_States
ix.          https://www.morganstanley.com/ideas/midterm-elections-2018-equities-fixed-income
x.           https://en.wikipedia.org/wiki/Freedom_Caucus
xi.          https://www.thecapitalideas.com/articles/midterm-elections-markets-5-charts
xii.         https://www.vox.com/policy-and-politics/2018/6/15/17458196/2020-democrats-liberal-activists-sanders-warren-harris-gillibrand-booker
xiii.        https://projects.fivethirtyeight.com/2018-midterm-election-forecast/senate/