What the Midterm ‘Affordability Election’ Means for Markets

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0:32Hi, Tellus. Hi, Miriam. So today's show is going to be about the midterms, which are coming up.

0:39Telis Demos: They are. I've just been seeing ads. So obviously I live here in New York. I think we have too many competitive races that I'm voting in. But I'm seeing a lot of advertisements for like Texas Senate and stuff. I guess they're advertising nationally. I'm not sure why exactly. Well, the Texas race could be a big deciding factor in the balance of power in the Senate, which we're going to talk about with our guest today, who is Monica Guerra from Morgan Stanley Wealth Management. She is the head of policy and geopolitical strategy there, and she was a previous guest on our podcast. She talked about tariffs, and back then she made the bold prediction that the Supreme Court would strike down Trump's tariffs.

1:23And indeed, that came true. So Monica is very prescient and very tapped in.

1:27Telis Demos: Yes, her tea leaf reading is pretty good, at least as far as stuff we've talked about. So, yeah, it's a great conversation. Before we get to that, I did want to mention CPI. Inflation data came in and it looks like inflation is still running pretty hot. Came in at 3.7 percent, pushed up by high energy prices related to the war in Iran. It's having a weird effect on the market, though, because after that report, you started to see longer term treasury yields really come down. You know, looking at the chart just this morning, I'm talking now on Thursday, I kind of had to do a double take. I was like, oh, what's the 10 you're at right now?

2:08Telis Demos: And it was at 5.05 percent. Wow, that's a big decline. And I was like, oh, I must be looking at another bond. That can't be right. And I and I looked again. And sure enough, like, you know, between when I got off the subway and when I got to my desk, you know, So the tenure had gone down like 10 basis points. So the move is pretty substantial. Do you want to know my theory? Yeah, I was going to ask, what is your theory for why this is happening? I'm so glad you asked, Miriam. What I think is happening is that now that people think that the Fed really is going to hike aggressively, that news is combining with a bunch of stuff that's going on in AI.

2:43Telis Demos: You have this kind of sell-off happening in chip stocks. You have banks kind of saying some cautious things about AI and credit risk. And you have some stuff going on with anthropics kind of numbers, you know, the revenue numbers they're putting out there. Are these numbers showing, you know, what we want them to be showing about the pace of growth in AI? So I think it's raising this notion that maybe the AI boom will actually slow down, that the Fed can, you know, bend the curve of it, which we talked about has been a real debate. Now maybe the market's thinking, actually, maybe that will work.

3:20Actually, the Fed maybe already had an effect on this trade. Yeah.

3:23Telis Demos: And so that means, OK, well, then you kind of want to own longer term bonds because the Fed will eventually have to sort of reverse course and stop hiking and maybe even cut a couple of years from now. So I think that might be what's playing out. But then again, I wouldn't be shocked if we come in next week and see yield back up again. And I think it's because there's just so many different calculations that are happening in the market's collective mind right now. And something I've written about is we have seen volatility measures of the bond market, which up until really a week or two ago had been pretty low, meaning that like though prices were moving, yields were going up.

4:03Telis Demos: It was kind of like they were sort of marching in order. Then when I saw those volatility measures finally jump up, I said, OK, well, that's typically when a sign that the market's just sort of we don't know what the price is anymore. And so that's why it's not shocking to me to see like these kind of gapping up and down type moves, because I just don't think that the market, like you said, it's got a lot on its mind. And I don't think it has a firm sense of, OK, this is where the math clearly says that the 10 year yield needs to be right now. Well, another thing that we wanted to see is the midterms and what the political situation could mean for the market.

4:40And specifically, you know, the outcome of the congressional races. It seems like we could have a blue wave or it could be at least a blue edging its toe over the edge kind of situation. A blue ripple. Yeah. Monica has a really interesting perspective on this. She's been on the ground talking to people across the country about the midterms and about what's on their mind. And it seems like there are kind of two big things. One is affordability and the other is kind of AI and data centers, which is related to affordability. And do I want a data center in my community has become a very big political issue.

5:21Telis Demos: And what I think this conversation shows us is that the same things that is on the mind of the market that we're talking about, what's going on with AI in data centers, what's going on with inflation at prices, you won't be struck to hear that those are big factors that Monica Thinker is sort of driving the way people are thinking about this election. So all of these things are coming together at the beginning of November in a pretty heady way. So I think all this wild market volatility, it's not going to go away anytime soon. We'll have that conversation with Monica Guerra of Morgan Stanley Wealth Management coming up in a bit.

6:24Thank you. Copyright 2026 Eaton Vance Distributors Inc.

6:35Monica Guerra, thanks so much for joining us. Thanks for having me. So we wanted to start off by having you set the stage. What are your expectations for what's going to play out in this midterm? So we're looking at macro factors along with polling momentum and the affordability issue that's really driving the equation. And we think that the house is going to flip. So Democratic control. And now we're in the camp where we think that it's going to be a blue hop in the Senate. What's a blue hop again? So 51 Democrats. OK, so it means a slight edge to the Democrats, but not as much as some people are saying.

7:12Right. OK.

7:13Telis Demos: Well, and I wanted to ask what makes you a little less bullish or whatever on a blue wave than you think other folks are? Well, when you think about how these races are won and lost, you have to take into account the dynamics of the map. So if you're thinking about a congressional district, it's about 700 ,000, give or take, of individuals. If you have a enthusiasm gap that has the GOP down maybe 0.5 percent in one of those districts, that could actually change that seat. But in aggregate, you have to think about all the different districts coming out. And then it's essentially a much higher burden, right, to flip the whole state.

7:50And so that's essentially gets us to the place where I don't see this as a blue wave, that there's still substantial structural support just from the way that voting works that supports the broader state level election.

8:02Telis Demos: Are there a couple of states where a surprise result could really change that? Like I think Texas obviously is one that people are watching closely. Michigan is a close race. Like what races would you look at as like the real bellwethers? So the races that we think are the closest are we're tracking ad spending. So in Ohio, for example, Texas is next on that list, Maine. And those are going to be the areas where both parties think that they have a shot. Right. So those are the most the most tense. Now, when one party decides to no longer spend, like in North Carolina, that's a pretty big signal that they think the Democrats, so the GOP, for context, is pulling their ad spending in North Carolina on Senate races.

8:45That means that it looks like the Democrats may take North Carolina. So for us, that's one of the signifiers that we're watching in that and that you could get, I would say, upset in Ohio, in Maine and in Texas if you're thinking about the GOP side. How interesting. So between a blue hop and a blue wave, what policies might not be able to make it? Like, what are the things that might face a higher hurdle with a barely Democratic controlled Congress? So if you're thinking about from a difference in 53 versus, you know, 50, 51, it's pretty marginal. You're likely to actually have quite a similar outcome where a lot of bills that are not subject to, you know, a potential budget reconciliation need that 60 vote threshold, right, that super majority.

9:39So things that could get through with using a budget reconciliation process, you know, like anything tax change that could happen. But the president is still likely to veto those. So from a status quo, not a lot changes. And you're still essentially in this, you know, for all intents and purposes in the same political dynamic, regardless if it's in it changing of the guard or if it's more of your wave deep win.

10:04Telis Demos: So then from like a markets and I guess markets, you know, being interested in policy standpoint, what what's the importance then of the Senate even flipping at all? What's the significance of that? Markets love gridlock in Congress. So that's sort of a historical truism that we've seen play out over and over again, where when you have gridlock Congress, you get returns that outperform versus other scenarios. A good example of this is that if you have a Democratic House and a Republican Senate, say we're wrong and they hold the Senate, you're looking at outperformance of about 23 percent under a Republican president versus other scenarios.

10:45Telis Demos: That's a 23 percent like stock, like S &P 500 performance. Right. Total. Average return. OK, OK. So then. So sorry, just say that once more. So on average, the total return and the S &B 500 in scenarios when you have it doesn't matter what side is holding each one, but you have a red and a blue in the chamber in the chambers versus a Republican president. It's 23 percent higher performance versus other scenarios. Are there things that the market would expect from a Democratic – so say they take both the House and the Senate. Are there things that the market would expect from a Democratic-controlled Congress that the market really likes or really doesn't like?

11:25Telis Demos: Like what are the policies that are going to be most in focus for investors in that scenario? So one thing I would say that I think is a little counterintuitive for talking about things that markets like and don't like is that you could have instances in which there is a negative political headline that people respond to very quickly when it does not mean negative fundamentals for that sector or industry. Right. So they are not the same thing. Good example of this is let's just talk about data centers. So now we're getting a lot of pushback at the local level. And the moratoriums in particular, you know, I double down on this on this view that the moratoriums are an opportunity to get more, extract more capex.

12:10So it's essentially incentivizing those public private partnerships. You're going to have more activity on the back end of that pushback of that political tension. Same thing could happen in Congress where, well, we don't think that the federal government is going to make significant moves in regulation because of the current dynamic. You could have hearings, you know, inquests, special reports looking at ways in which policy should be managed or changed. And on the back of that, you get volatility around that sector. But in our view, that could potentially be a really attractive entry point, given that it's not truly altering that long run cycle, the economic cycle behind it.

12:58Telis Demos: There's the noise, there's the signal element of it. And in a Democratic-controlled Congress, it can last for a while because you'll get the House and then the Senate agreeing. But you're saying, ultimately, it's unlikely to change policy trajectory. So maybe weakness for a sector would be a buying opportunity in that case. Right. Exactly. And, you know, the sectors that have really run up right now, you have to take it, take that into account. I know there's lots of different reasons for watching that, you know, for how hot things have been. But that also essentially adds what we call, you know, policy headline volatility.

13:34Right. So your policy risk, because essentially people are looking for that signal of when when things have gotten too toppy. And so there could be a more knee jerk reaction when the broader cycle is actually not done. For example, AI regulation seems like one. I mean, beyond the data center issue, there's been a lot of talk about what you know, how are we going to make sure that AI doesn't kill us? And an AI czar has been appointed, Jay Clayton. So, you know, and Democrats, I think, are probably on the fly trying to figure out, I don't know, maybe you know more about this. What is our view? What is our stance on AI going to be?

14:10Do you think AI regulation favors Democrats or Republicans yet? Or is there one party that sort of stands for that more than the other? I think there's this, you know, a misunderstanding or a conflation of ideas where data centers become this proxy for all things AI, right, where everyone seems to want guardrails. And then from the public standpoint, what is the closest tangible thing you have other than the bot and your phone, right? It's the data center that's being built down the road. Here's something I can do about my nervousness around AI. I can vote against this data center. Right. And so when we think about the bipartisan opportunity around that legislatively and locally in particular, I think that, you know, when you take a state like Texas and you take a state like New York, you know, they're doing what sort of like.

15:03Like, I don't want to give like a value on whether they should or shouldn't be doing it. But let's just put it this way. If you're looking to get more, right, from an infrastructure bid and try to, you know, improve the grid and try to get water sewer improvements, the list goes on and on and on. They're doing what they should be doing, which is renegotiating those terms. Now, on the AI specific front and regulation there, I think that guardrails are actually, again, a positive because it'll essentially take temperatures down. People will feel like things are being done, that they can move forward.

15:40I think it's similar in the way that we think about the Genius Act and other legislation that started introducing market frameworks for crypto and digital currencies. It essentially created the rules of the road. And that's essentially what people want. And it will allow not just for the private sector to operate more confidently, but the consumer.

16:04Telis Demos: That's interesting because those are things that you could cast on the one hand as like, oh, OK, the government's regulating this right now. It's putting some limits on what people can do. And so you think, oh, that might be bad for that. But you're saying that in the long run, that kind of lays the rules of the road and then things can really evolve from there. So AI could maybe end up sort of like the way stable coins did, ended up getting boosted by this regulatory effort. Right. And when you think about when regulation comes in and if it if it is stifling, generally speaking, that's later in the life cycle of that technology, right, or of that business.

16:39And so this is when you're starting something brand new, everyone has to agree to what the rules are, how far we can go. Now, the thing that the U.S. does, you know, I would say very well, right, is that we innovate first and regulate later. Now, is there an opportunity for the Democrats to work with President Trump on this? Absolutely. It just depends on, you know, what else is at stake, because as we've seen, a lot can change in just a year. And so 2027 is going to be a really interesting resetting of the table for Democrats of trying to figure out, you know, their broader policy views as they had as we head towards the next general and for the GOP.

17:19Telis Demos: I do want to ask you a little bit about on the data center point. Just you've been on the road. You've you've been in different states. I'm sure you've talked to a lot of, you know, other voters and all kinds of people. is there a constituency for sort of is there a pro data center constituency remaining because it seems like both parties have you know and you can point to this this republican has flipped to be anti-data center this democrat has flipped to be anti-data center it seems like a bipartisan issue now to be anti-data center and is that going to be a winner in the midterms and then kind of push forward do you think we'll see some pullback i just want to get your view from the ground of like, what is the state of data center politics?

18:00Yeah. So one of the things that I think is so fascinating about this election cycle, you know, I've been working in policy and politics adjacent roles, you know, for the last 20 plus years. This is the most heated I've seen, at least our client and base. Now you typically will get partisan politics, right? Team sports, People are angry for very different reasons. They're usually bigger picture ideology. Right now you have this joint agreement that everything is about affordability. Now, somebody might not frame it that way. So it might be the data center. It might be the price of gas because I'm in California and I'm already burdened.

18:44It might be that you're actually doing pretty okay, but you're just worried about your grandkids being able to get a house, right? And the cost of that.

18:54Telis Demos: So data centers in the affordability conversation too? Yes. And so it comes into that around the cost of energy, right? Because especially if you're in a place like Ohio, which I was just, you know, three weeks ago, I've been on the road for two months straight. This is the one day I'm here this week in New York. We're so thrilled that you were joining us on that day. So, you know, this is something that comes up just with a different a different book cover right is essentially how do we make this work because since covid you know there's been this relative cost level shift upward whether that's because of inflation or pass through costs from tariffs the list goes on and on energy crisis um then you throw in data centers and it's sort of again it becomes emblematic of a lot of different things and so but this i would say is probably the most heated i've seen at least our client base um and i'm talking you know, all spectrums, right, of the wealth channel.

19:48So not just your most wealthy, but also down to, you know, people who are just trying to, you know, plan for their comfortable retirement.

19:56Telis Demos: Post midterm, are we going to see a pretty strong agenda for data center regulation, you know, higher barriers to build? I mean, honestly, I'm not even sure what the specific policies are around that. It seems like such a local issue. But what do you think we could get out of midterms in terms of data center politics? So this, I would say, is the moment that you're trying to seize upon, right? When you're thinking about the political pushback at a point where the politicians have the incentive to be aggressive, right? Because they're trying to bring something back home to their communities that they've made a difference, right, in their in their life.

20:41This is doesn't mean that there isn't going to be continued pushback at the local level, but at the federal level, you could I would predict that you could get some of that, you know, you know, a break on that essentially fading a little bit into the background. It'll still be part of the conversation, but not necessarily the same level of urgency, because like you mentioned, right, this is more of a state and local issue, right? It's, you know, are you selling farmland? How are you zoning this, you know, parcel of property? What is the property tax abatement that we are going to give or now rescind?

21:17Right? So those are all issues that are handled at that local level. So do I think that that continues at the local level? In certain pockets, but it also creates this opportunity for the governors and local government to really play hardball. And then after the election, come home and say, look at what I got for us. Mm-hmm. Right? Yes, we're going through with this project and this project and this project, but they're also, you know, helping support transmission lines and they're going to give a subsidy to everyone in this community that's prices have gone their energy prices have gone up 200.

21:51So your power bill won't be going up as much as you thought. Right. Exactly. So I think that there is sort of an opportunity to come home with, you know, like like what did we negotiate for? Right. And maybe we can make this work for everyone. And I think that is likely to be the narrative. But it is going to be in pockets. When you've been out talking to people, what specific things do you think voters and other constituencies are looking for on that affordability agenda?

22:17Telis Demos: Is there a policy or two that you can say these are the things that have kind of emerged as like, here's what we can do? Yeah. So the biggest changes for for individuals would be getting a resolution between U.S. and Iran reopen full reopening of the Strait of Hormuz and the war. And the war. Yeah. And. And in that, right. And I remind people, right. There's going to be a period, three or four months or longer of refilling strategic reserves globally that the costs aren't going to come down right away. But even the symbolic gesture of ending the war could be a real benefit, not just on the affordability piece, but also for the GOP, right, of saying, OK, we heard you loud and clear.

23:02We're moving on to the next phase of this, whatever that looks like. The other piece of this does have to do with people's concerns around how do you make Social Security solvent? And there's a whole lot of different answers for that, but none of which politicians agree on. There's all these different things that you could potentially explore, but the political expediency of it demands some sort of crisis or that tipping point. Because Congress tends to address the really hard stuff when they absolutely have to. And the room for negotiating on the margins essentially dwindles. You have to essentially have to make a decision.

23:43Maybe then at least if you're going to have part of your constituents being really angry at you for whatever solution you've come up with, you can say, well, I had to do something, you know. Right. And you're trying to prevent a reduction in benefit. Right. And that is, you know, the primary message that you're coming home with, right, is that, you know, you are getting 100 percent of what you're expected to receive. you know that's a very different narrative than saying we couldn't figure it out and now you're taking a 22 percent or more haircut depending on how you're calculating it and then you know the other sort of harsh reality that we talk about and that clients ask me about is you know is there a point where then where taxes will have to be raised right and where where do you get that where do you you know and you can go through all the different options of the different types of taxes that are out there.

24:33Telis Demos: Federal wealth tax anytime soon. So there's I'm not going to comment on that. But that could be something that people talk about. Right. But it would have to be at a level that pulls well. Right. Right. And it gets a very significant amount amount of support. I think that it would be, again, a very difficult something like that would be hard to achieve. All right. We're going to take a quick break. And when we come back, we'll have more with Monica Guerra of Morgan Stanley.

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25:27Telis Demos: turning to the big topic that i know we've all we've been talking about on this show and i know all of our readers and all the writers here are talking about which is yields interest rates one thing that could maybe change the trajectory of the bond market would be a pretty meaningful change in the trajectory of the federal budget could congress actually start to cut some spending or lower the sort of bend the curve of future spending, austerity or austerity light or something like that. And in the past, you know, Democrats have, despite maybe what some would say their reputation is sort of, you know, spendy, they also push for taxes.

26:03Telis Demos: Right. So, you know, sometimes Democrats have been associated with surpluses and things. So what would you say is the outlook for spending and budgets coming out of midterms? So one of the things that I think is interesting about all of this is that we're entering into an era where fiscal austerity is is on the table and maybe not for the reasons that that we would think. So you would think that if you added significantly to the debt and deficit year over year and now we're you know over 40 trillion right and in debt that that alone would be enough to to curb right behavior. I argue that But it's actually more politically expedient in order to, I would say, not support the president on certain priorities.

26:56Right. Because there's likely to be a continuation of spending. That would be the natural propensity, especially if you had a gridlock government, you actually could get more spending through, which is which is, you know, hard when I'm talking about gridlock Congress. It would be clarified.

27:12Telis Demos: You mean split in House and Senate? Split in House and Senate. You can actually get more spending through because there's opportunity to negotiate. Right. There's that opportunity to, you know, go budget line by budget line, get to a place where everyone feels OK, even if it's even if it's painful and fraud. Right. Right. Because it's something the president might actually sign. Yeah, you might actually sign. Right. But so if we're in a position where everything's being done through budget reconciliation and the president, for example, is asking for more defense spending, that could be an area where defense is flat or down.

27:47Right. So this is this is something where, you know, we've had a significant increase in the defense budget. I'm I'm very well known bullish on on defense. I think you talked about that on this podcast. Still am.

28:00Telis Demos: I mean, that actually kicked off a few episodes for us just talking about that point. That's right. Yeah. Really. You were early on that. I mean, so I'm still I'm still there. Just you got to remember that the next two years might be a little dicey. So take the thematic view. Can you explain that again? So it's the president will push for more defense spending. But Congress, presuming your, you know, base case occurs, Congress will say no. But they'll say, but we want this instead. And then they'll go kind of back and forth. Why do you see it kind of flatlining? Okay. So what's different about it this time is that you are likely to have about a 30 % increase at the end of the day this year.

28:41That's already baked in. And that's the assumption we're making when we're thinking about the NDAA, which hasn't been finalized yet, and then the supplemental spending. For defense. For defense and for, you know, conflict.

28:56Telis Demos: Give us an acronym real quick, NDAA. The National Defense Authorization Act. Okay. And I had to remember. The last time we had an increase of that size, it was about 35 percent increase. And that was during the Korean War. So this is wartime spending. On average, the defense budget usually increases 3.5 percent. Okay. In our view, we're looking at the possibility if there's any austerity, it's likely to be in that camp, especially given the fact that the U.S.-Iran war is unpopular. In the next year, it is, you know, I would say a very low probability that you get another big increase because of how large this one was this year.

29:40Telis Demos: So in your base scenario of Democrats take House and Senate, not overwhelmingly in the Senate, you think that that might, at least in the near term, mean less defense spending than you would have otherwise forecast. Right, right. But like maybe the headline number gets a little smaller than it otherwise would have been interesting. Okay. I would argue that that would be a very – they're very bullish for the long end of the Treasury curve just to see some progress on that. Yeah. I mean, it definitely wouldn't hurt, right, as far as broader confidence. You know, the other thing that we're watching, especially if we're thinking about debt and deficit, is, you know, potential pockets of volatility around the debt ceiling because that's going to be contentious.

30:24So as far as we're concerned, you know, we when we're talking to our clients, the resolution of that, whether it's a suspension or a raising of the debt ceiling, we think we will get it. One of the things that's really important about this administration that I come back to is that if there's any part of the market that Trump is squarely focused on, it's the U.S. Treasury market. If you think about Scott Bessent, where are his priorities? It's the U.S. Treasury market. This is something that we think will absolutely get resolved, even if it's looking dicey. Right. So if there is volatility in the market, just remember that that this is number one.

31:07If we're thinking about financial markets policy and monetary policy, Trump cares about this. We can he will handle and tolerate a lot of equity market volatility. But on the U.S. Treasury side, that's not that's not the case. So, Monica, as we get closer to the midterms, what should investors be watching to try to get more of a sense of the direction things are going? Yeah. So I would say ad spending. We touched on that earlier. That's that's number one. If you're worried or concerned watching the Senate. The other thing that I that you want to watch is, you know, what happens with gas prices in years in which there is a gas price increase during a midterm.

31:47It doesn't matter if it's 50 cents or a dollar. The sitting president's party loses 32 seats on average in the House of Representatives. So that is notable. So something materially changes in the next three weeks. You know, that could that could alter the outcome. Look up at the big sign as you drive. I get a lot of questions about polling and the accuracy. I would say, you know, if you're looking to get a real sense, you know, look at it as a point in time enthusiasm indicator. Polling is valuable. Right. It tells us where where people's heads are at right now. That doesn't mean it can't change.

32:22And then just remember that elections are won and lost in the last two weeks. So we're almost there.

32:28Telis Demos: Monica, this has been a fantastic conversation. Thank you so much. Thank you. And that's everything you need to know to take on your week. The show is produced by Alexis Moore and Michael LaValle. Michael LaValle is our sound designer. He also wrote our theme music. Aisha Al-Muslim is our development producer. Chris Zinsley is our deputy editor. Lita Al-Mulad is our senior director of shows. And Samantha Hennig is the Wall Street Journal's head of multimedia. For even more, head to WSJ.com. I'm Miriam Gottfried. And I'm Telus Demos. Till next time. The rain in Spain speaks the Queen's English here in mid-Atlantic region

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