Washington Can’t Agree on Much, Except Spending: Why Markets May Like What Comes Next

Washington Can’t Agree on Much, Except Spending: Why Markets May Like What Comes Next

If there is one thing Republicans and Democrats can agree on in Washington, it is that spending money is a lot easier than saving it.

The two parties may disagree on taxes, immigration, healthcare, energy, regulation, and just about everything else. But when it comes to opening the government’s checkbook, both sides have historically found common ground.

And that could end up being an interesting development for financial markets.

With a new political landscape emerging after the midterm elections, investors may want to pay attention to an unusual combination developing in Washington: bipartisan spending agreements in some areas, political gridlock in others, and a government that continues to run substantial deficits.

In other words, Washington may have trouble agreeing on how to govern, but it rarely has trouble agreeing on where to spend money.

Republicans and Democrats Have Different Priorities, but Similar Habits

Republicans generally favor higher defense spending, infrastructure investment, border security, tax incentives, and business-friendly economic policies. Democrats tend to prioritize healthcare, social programs, education, infrastructure, and other government-supported initiatives.

The priorities are different, but the underlying economic effect can be similar: more government dollars flowing into the economy.

This is where bipartisan compromise becomes important.

Even when Washington is politically divided, there are areas where both parties have incentives to reach agreements. Defense spending, infrastructure, disaster relief, and certain economic initiatives can all become opportunities for compromise.

These agreements can provide additional fiscal support to businesses, households, and industries throughout the economy.

For investors, that matters.

Why Markets May Like a Little More Government Spending

Government spending is one component of economic activity. When the federal government spends money, those dollars ultimately find their way into the private economy through contractors, employees, suppliers, businesses, and consumers.

That activity can support corporate revenues, employment, and economic growth.

It can also contribute to a more supportive liquidity environment, depending on how the spending is financed and how Treasury cash flows interact with the banking system.

Markets generally appreciate an environment where money is flowing through the economy, businesses are generating revenue, and consumers have the ability to continue spending.

This doesn’t mean every government spending program is productive or that deficits don’t matter. They absolutely do. But from a near-term market perspective, fiscal spending can provide an economic cushion that investors sometimes underestimate.

The Congressional Budget Office has projected a $1.9 trillion federal deficit for fiscal year 2026, illustrating just how much fiscal support is already embedded in the economy.

The question isn’t necessarily whether Washington will spend money. It is how much more spending could emerge through bipartisan negotiations.

Gridlock Isn’t Necessarily a Bad Thing

Here is where things get interesting.

While spending agreements may find bipartisan support, many of the more controversial policy initiatives could face significant resistance in a divided political environment.

That creates the possibility of a political backdrop where the government continues funding major programs and reaching spending compromises, while having a much harder time implementing sweeping changes elsewhere.

From an investor’s perspective, that isn’t necessarily a bad outcome.

Markets generally prefer predictability over dramatic policy changes. Businesses can make investment decisions when they have a reasonable understanding of the regulatory and tax environment. Uncertainty surrounding major legislative changes can make companies more hesitant to hire, expand, or deploy capital.

Political gridlock can sometimes limit that uncertainty.

Of course, gridlock also comes with risks. Government shutdowns, debt-ceiling confrontations, and delays in legislation can create short-term volatility. But preventing major policy changes can also provide a degree of stability for businesses and investors.

Sometimes, Washington doing less can be just as beneficial as Washington doing more.

The Bigger Picture: Fiscal Support Meets Private-Sector Innovation

There is another reason investors shouldn’t overlook this environment.

The private sector continues to invest heavily in artificial intelligence, technology, energy infrastructure, manufacturing, and productivity-enhancing innovations.

These investments have the potential to drive economic growth for years.

If government spending continues supporting certain areas of the economy while private businesses lead the next wave of technological investment, the combination could provide an interesting economic tailwind.

Think about the capital required to build data centers, expand electrical infrastructure, modernize manufacturing, and support America’s energy needs. These are enormous investment opportunities that extend well beyond Washington’s political calendar.

Government spending can provide support, but ultimately, sustainable economic growth comes from businesses innovating, investing, and creating value.

That distinction matters.

The Risks Investors Shouldn’t Ignore

There is a difference between markets liking government spending today and the long-term economy benefiting from unlimited deficits.

Eventually, government borrowing has consequences.

Higher debt levels can put upward pressure on Treasury yields, increase interest expenses, and compete with the private sector for available capital. If fiscal spending becomes excessive relative to the economy’s productive capacity, it can also contribute to inflation.

That is why investors should pay attention not just to how much Washington spends, but also to interest rates, inflation, Treasury issuance, and the Federal Reserve’s monetary policy.

Fiscal stimulus and monetary liquidity are not the same thing. Government spending can support economic activity, but how that spending is financed and how the Federal Reserve manages its balance sheet matter just as much.

The market needs to see economic growth without an uncontrollable increase in borrowing costs.

The Investment Takeaway

Investors sometimes spend too much time worrying about which political party controls Washington and not enough time focusing on what actually drives markets.

Corporate earnings, economic growth, interest rates, liquidity, productivity, and investor sentiment ultimately matter more than political headlines.

Republicans and Democrats may spend the next several years fighting over how the country should be governed. But if history is any indication, neither party is likely to develop a sudden passion for fiscal restraint.

That could mean continued government spending, bipartisan compromises in key areas, and political gridlock that prevents some of the more sweeping policy changes investors worry about.

It isn’t a perfect recipe, and deficits remain a legitimate long-term concern. But it could create a more supportive near-term backdrop for economic activity and financial markets than the political headlines might suggest.

The bottom line?

Washington doesn’t have to agree on everything for the economy to keep moving forward. And sometimes, the best thing politicians can do for investors is spend money on the things they agree on and leave the rest alone.

At the end of the day, investors should focus less on the political scoreboard and more on the economic fundamentals. Dream Bigger, Sleep Better.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

JOLTS Job Openings were 7.523MM vs. exp. 7.1MM expected, with Quits at 2.1%, the highest in a year. That’s not the weak job market people keep expecting. All that said, the job openings were heavily slanted to government hires, with private-sector looking worse. Overall, the report seems a bit strong, but nothing huge.

Factory Orders were 1.8% m/m vs. exp. 1.2%. Core Orders were 1.3%, so it wasn’t just volatile transportation orders. Economy is looking strong.

All that strong data got bonds down (yields up) with the 10Y yield moving up 6bps to 4.97%.

Then, elections came out broadly as expected, with Democrats winning both sides of Congress, creating gridlock, where government is ideologically split. After initial significant declines, futures are now positive. That also got the 10Y T yield near where it started, at 4.92%. Also, the dollar is down and gold is back over $4,000.

AMD is up 7% as results and guidance were better than estimates on data center strength.

ADP Employment and ISM Services today, along with the Treasury’s QRA (Quarterly Refunding Announcement), which is how the Treasury plans to fund government.

Bottom Line: Futures dumped overnight on a strong Democrat win, but now we’re back and bidding.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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