“Successful preservation of capital must overcome the handicaps of socialistic governments, supposedly to help the masses.”
– Gerald Loeb (The Maxims of Wall Street, Page 147)
With the Democrats winning the House and the Senate in a landslide, investors are being warned to get ready for a bloodbath similar to the one we saw on Thursday, November 5. Should investors and retirees be concerned? Could your 401(k), Simplified Employee Pension, and IRA accounts lose up to 50% of their value, as they did in the 2008 financial crisis?
The Democratic leadership will have a whole new agenda starting in January. They hope to end the trade war and the war in Iran, which will help reduce the cost of living and be positive for the stock market.
But many also have plans to investigate Elon Musk and the Trump administration, raise taxes on the rich, approve activist federal judges and Supreme Court nominees, and maybe even impeach President Trump again. With the Senate in the hands of the Democrats, expect a trial.
They may even entertain more radical proposals, such as packing the Supreme Court to 13 justices, imposing a “wealth tax” on the super-rich, pushing for “Medicare for All,” and nationalizing SpaceX. (I doubt any of these ideas will pass Congress, though.)
Most investors are happy that the Democratic victory was not enough to win 60 seats in the Senate (the number needed to overcome a filibuster) or a two-thirds majority in the House and the Senate, which is the amount required to override a presidential veto.
With both promise and risk on the horizon, let’s take a closer look at what history tells us about markets under divided government and what I heard from some of America’s most successful investors last week.
Get Ready for Trouble
Historically, Wall Street likes gridlock. But according to RBC Wealth Management, from 1953 to 2025, the best returns on Wall Street occurred when there was a Democratic president and a split Congress, while the worst returns were under a Republican president and a Democratic Congress (which we’ll have starting next year!).
Here’s a closer look at what RBC’s analysis found…
Another study showed that for the past 19 election cycles, returns have always been positive the year after the midterms. Hopefully that will be the case again, but rules are sometimes broken.
Washington isn’t the only variable in the future of the stock market. There’s also Federal Reserve policy. A tight-money policy is usually negative for stocks, and easy money is positive. New Fed Chairman Kevin Warsh is an inflation hawk, so that could mean higher interest rates and more trouble for Wall Street in 2027.
In short, there’s plenty to worry about. I’m taking a more conservative approach as we head into 2027. Our primary goal is protection of capital in these uncertain times.
Billionaire Ron Baron Remains Optimistic
Though there is reason for concern, plenty of investors remain optimistic as well. Billionaire Ron Baron, for example, remains focused on the long term, and he’s betting big that the companies he owns will keep growing.
Last Friday, my wife and I attended the Baron Investment Conference in New York City. Nearly 7,000 shareholders of the Baron group of mutual funds were there to hear Baron interview Elon Musk, who appeared by video because of growing security concerns. (We were told he has better security than the president of the United States!)
Almost half of the Baron Partners Fund is invested in SpaceX and Tesla stock. Musk and Baron were upbeat about the future of both companies, saying revenues will double in the next quarter. Musk said local ballot measures to stop the building of data centers are a “temporary” setback. Baron still believes the funds’ investments in SpaceX will increase tenfold in the next 15 years.
Whatever happens in Washington, Baron is clearly confident in the long-term growth of these companies.
A Defense of Capitalism
The optimism didn’t mean politics was off the table, though. One of the most memorable moments of the conference came from a speaker who dove into the political debate headfirst.
Among the top CEOs and investors I met at the conference was Thomas Peterffy, the founder of Interactive Brokers, the revolutionary online brokerage firm. Like Baron, he is a member of the Forbes 400 list of the richest people in America. An immigrant from Hungary who came to America with nothing, he is now worth over $100 billion.
And he’s not slowing down at age 82! He gave the most powerful speech I’ve ever heard defending capitalism and warning America not to go down the path of “socialist” Hungary, where there was poverty everywhere. He was referring to cities like New York City, Seattle, and Los Angeles, where voters have elected “socialist” mayors. (You can watch his entire speech right here.)
He told the audience…
In a free market, it is the individual in the arena who drives so much of our progress.
Economic achievement is not evenly distributed. A surprisingly small number of builders can create an enormous share of the advances that transform our lives.
When they succeed, they do not just enrich themselves. They create massive consumer surplus.
When we tightened market spreads and cut commissions, who gained? Interactive Brokers grew, yes. But our customers kept billions of dollars in their pockets every year.
That capital went into buying homes, educating children, and funding more startups.
The entrepreneur may capture only a fraction of the total value created by a successful innovation. Much of the rest shows up as cheaper products, better tools, and higher living standards.
Letting these ambitious builders keep the wealth they create is an extraordinary gain for society.
It’s a timely message, given some concerns that the new Congress will raise taxes on the rich and perhaps even impose a wealth tax.
Why You Should Admire Ron Baron
Ron Baron brings people together, even when they differ in politics. He’s a lifelong Democrat, but he is close friends with and does business with people like Elon Musk and Thomas Peterffy, even though they support Republican candidates. We need more like him in Washington.
And not all of the Baron conference was about money and politics. Baron is famous for “entertaining the troops” by sponsoring top entertainment. In the past, my wife and I have enjoyed free performances by Paul McCartney and Barbra Streisand, and this year, we saw comedian Jerry Seinfeld!
With a new Democratic Congress, a hawkish Fed, and plenty of policy debates ahead, there’s no shortage of uncertainty heading into 2027, and as I said, I’m taking a more cautious approach.
But the Baron conference was a welcome reminder of what’s still going right: entrepreneurs building great companies, investors staying focused on the long term, and a host who brings together people from both sides of the aisle.
In uncertain times, it’s worth remembering that what happens in Washington is only part of the story.