Policy, Politics, and Your Portfolio: What to Know

As heightened market volatility converges with the upcoming high-stakes election season, many investors are wondering how developments in Washington could affect their finances. Here, Michael Townsend, managing director of legislative and regulatory affairs at Schwab, answers common questions about the economic and legislative shifts that can influence markets.

"I think households have felt inflation in two places: the price of gas and the price of groceries—and the war affected both. The summer ceasefire was fragile, and there is no timeline for when oil production and shipping will be back to prewar levels. All of that plays a role in how long this uptick lasts. I don't think inflation is going to spike, but this continued upward creep is very possible into the fall."

"President Trump has made it clear he'd like to see the new Fed chair, Kevin Warsh, cut interest rates this year. However, the Fed chair cannot make interest rate decisions unilaterally. He is just one of 12 voting members of the Federal Open Market Committee [FOMC]—the group responsible for setting interest rates—and several members have expressed concerns about inflation figures this year. At the June FOMC meeting, nearly half of the members projected at least one rate hike—rather than a cut—before the end of the year. The Fed is very data driven. They'll be watching jobs and inflation data closely, but rate cuts seem like a distant possibility at this point, and a rate hike is very much on the table."

"Regardless of economic conditions, midterm elections historically have been challenging for the sitting president's party. Since 1906, there have been only three midterms where the president's party gained seats in the House.

"However, this election could be especially challenging for Republicans. The combination of rising prices and geopolitical tensions is creating a negative atmosphere for the party in power heading into November.

"Most analysts expect the midterms to result in a divided Congress—with a narrow Democratic majority in the House and a narrow Republican majority in the Senate. If that happens, we're likely in for gridlock in Washington, where Congress struggles to accomplish even basic legislative tasks like funding the government, and passing major legislation becomes all but impossible."

"Earlier in the year, the markets seemed more reactive to the news, but we've seen a shift recently. It's almost as if the baseline has changed. The market has become more resilient and isn't overreacting to everything that's going on the way we as individuals might.

"It's understandable to feel unsettled by the headlines, but it's vital to remember that emotions don't mix well with investing decisions. You can't and shouldn't react to every development. There is a lot happening in Washington that you may feel strongly about personally, but much of it doesn't actually affect the markets or your portfolio. It's incumbent upon us to keep that distinction in mind and stay the course."