Podcast: Speaking of Quality Season 6 Episode 3 Title: 2026 Policy Outlook and Market Implications Episode Transcript:

Maxine Cuffe 00:03 

You’re listening to “Speaking of Quality” with Hank Smith, a podcast by The Haverford Trust Company. On “Speaking of Quality,” Hank features authors, business leaders and wealth management experts who share stories from their careers and insights on topics that impact financial wellness. And now, here’s your host, Hank Smith. 

Hank Smith 00:24 

Hello, and welcome to another episode of “Speaking of Quality.” I’m your host, Hank Smith, Director and Head of Investment Strategy at The Haverford Trust Company. On this podcast, we explore topics ranging from leadership, economics, capital markets, civic engagement and community building. Today, I’m taking a break from hosting and passing the microphone to my colleague, Tim Hoyle, Haverford’s Chief Investment Officer. Tim recently sat down with Dan Clifton, Partner and Head of Washington Policy Research for Strategas Securities. The two discussed what government policies investors should keep an eye out for in 2026 and how these developments may impact the economy and financial markets. It’s quite an insightful conversation and an important one, too, as we look ahead to the coming year. So, without further ado, here’s Tim and Dan. 

Tim Hoyle 01:23 

Dan, thank you so much for joining us today. We had the pleasure of hosting you at our Client Investor Forum about 10 months ago in May of 2025. And at that time, the theme of that conference was really the President’s everything-all-at-once, flood-the-zone, policy initiatives. And it seems like macro policy news has not abated one iota since then. In fact, it’s almost accelerated, hasn’t it? 

Dan Clifton 01:53 

Yeah. So, first, thank you for having me today. And I think about that client event that we did last spring, and it was just coming at us like a fire hose in terms of everything the President wanted to do. And I think the difference today than where we were in the springtime is that, now, some items have actually gotten done. Like the tariffs were at the beginning stage. Now the tariffs are in place. We have a good range of outcomes of where those tariffs are going to be. There’s obviously going to be a Supreme Court decision on them. But at this point, investors can kind of handicap where those tariffs are. What you are now starting to see, though, is a big shift on monetary policy where the Federal Reserve has now got more comfort on tariffs and are starting to lower interest rates. They’ve expanded their balance sheet. And I thought the administration made a huge mistake last summer, and Congress made a huge mistake last summer, by delaying when the tax cuts in their “One, Big, Beautiful Bill” would come into effect. And now you’re going to start seeing those tax cuts come into effect. So, I like to say the mistakes that the Fed made by holding off on monetary policy, the mistakes Congress made by holding off on tax cuts, made 2025 a bit more grindier, but it’s actually creating a much better backdrop for 2026 for the U.S. economy. And you could start to see those decisions take hold. 

Tim Hoyle 03:20 

You’ve characterized 2026 as a year of shock-and-awe economic policy, right? So that the tax refunds, I think you’re estimating them to be up 40% year over year. 

Dan Clifton 03:35 

Correct. 

Tim Hoyle 03:36 

And then what other components are there to that shock-and-awe policy? 

Dan Clifton 03:40 

Yeah. So, I’m sorry for not being specific on that before, but there’s two major levers on tax cuts. Number one is the consumer tax cuts. So, in 2025, consumers got tax cuts for a higher state and local tax deduction, an increase in the child tax credit, lower taxes on tips, overtime, senior citizen income. And when you add all that together, it’s about $170 billion of gross additional tax refunds. And there’s some offsets to that. You’re going to get a higher tax liability from capital gains. You got some other consumer programs that are winding down. And when you put it together, it’s about a 40% increase in the size of tax-refund season in February, March, and April of this year. So wildly accretive to the US consumer. And then behind that are these business tax cuts, which are about $200 billion of business tax cuts. Those are really three major provisions designed to get companies to make investments. So, if you invest in research and development, which is something healthcare, technology, and industrial companies do a lot, you can now write off that expense because Congress is saying, “We want you to do more research and development, develop new technologies.” A second is what’s called 100% expensing of capital goods orders. This is when you buy a large piece of equipment for your factory. If we are going to do more reshoring here in the United States, then we should be incentivizing companies to make those investments and change the rate of return on being able to make those investments. And the third, which is brand new and never been done before, is this idea of allowing companies to write off 100% of their factory purchases. And so, we’re still waiting on the rules for that, but, eventually, we’re going to get the rules, and it’s going to make it much more cheaper to build factories here. So, when you put that together, it’s like $350 billion of incremental fiscal policy stimulus in 2026 as part of our big shock-and-awe economic policy theme. 

Tim Hoyle 05:48 

Dan, one of the questions that we get from clients a lot on that last topic is, are you seeing real investment yet from corporations, or is it still just headlines, press releases? When do you think we’ll actually see shovel-ready projects? Remember the whole shovel-ready-project line from the Great Financial Crisis? When will we actually see these projects hit, and are they hitting actually? 

Dan Clifton 06:13 

Yeah. So, I think there’s two different types of investment that are happening. One is the investment that was happening regardless of these tax bills, and that is going to be the AI data centers. When we came into 2025, we started talking to a lot of construction companies and trying to get a sense of what they are. And what they would argue to us is that there was really two types of environments in the building world. There was the AI data centers which were being built and nothing else. Maybe some multifamily housing units, but it was like a depression in anything other than AI data centers. And so, the AI data center trend is going to continue, and it’s now cheaper to do the AI data centers because of these tax provisions, but that was probably going to happen regardless of whether the tax bill passed. Now the key is whether you’re going to get new factories that were going to be built, that weren’t going to be built, that are now going to be built. And I think that’s going to be an important distinction. Obviously, you got to wait for the rules on the factory purchases, but you should start to see pickup and cap good orders and research and development in the next quarter or two because those rules are fairly straightforward. We had these provisions in place. 

Tim Hoyle 07:23 

I think we’re also seeing meaningful investment in healthcare CapEx and healthcare construction, especially here on the Eastern Seaboard in this area of the country. 

Dan Clifton 07:32 

I would agree with that. And if you look at the trade data that was released this week, you’re starting to see a lot less trade coming in from Ireland, which is the pharmaceutical companies, which is exactly what Trump was trying to achieve by getting those pharma companies to be able to commit to more development here. And then you have the very important life science tool industry, where you’re also seeing investment that’s happening in the healthcare space overall. So those are very good points. I just think that they’re going to accelerate once the rules become clear on many of these tax provisions because the hurdle-rate to make that investment is now going to be significantly lower when you could write off the cost of that from your taxes. 

Tim Hoyle 08:13 

Dan, on the personal taxes and the refunds that are expected from the postponement of having taxes deducted from your payroll, from your paycheck for tips and overtime, has that now been put into place in 2026 where it will be an ongoing payroll adjustment and not a catch-up at the end of the year? 

Dan Clifton 08:36 

So, it’s very interesting. I mean, there’s a real possibility that you get your tax refund for 2025 tax cut and your money gets withheld for 2026. So, you’re getting two years of tax cuts this year. I mean, that’s even bigger than what I just outlined to you. Now, I’m a little bit hesitant on that. And the reason is that for those changes to be made in your paycheck, the taxpayer has to fill out a form, and that form then has to be given to their employer to make those withholding adjustments. I would feel a lot better about the size of those withholding changes being made if I saw two things. Number one, a broad outreach from the Trump administration to the major employers in this country telling them that they should be doing a campaign to get their employees to change their withholding, and we haven’t really seen that. Number two is the Treasury Secretary should have done advertising on the TV. I see Kristi Noem and Homeland Security doing lots of advertising. I thought the Treasury Secretary should have been doing ads and saying, “You can have higher take-home pay if you do this, but you got to proactively make the change.” So, the IRS really did make it possible because they changed the form. The form used to be very simple. How many kids do you have? What’s your income? It’s like four or five lines. Now it’s like, how much tips did you have last year? What was your state and local taxes? They’ve literally created these separate line deductions. So, it’s complex. There’s a lot of friction there. And so, we’ve been conservative in our estimate. We’d rather come in low than overestimate that. But I think that when you can see it, you’ll be able to see it. And withheld income tax payments, we get it every day from treasury, so we could see whether people are taking that deduction. And then there will be the personal income data that comes out in about a month or so where they have a line item which is called real disposable income, and that’s after tax, after inflation income. So, we’ll see if people are using it. If not, I would anticipate that Treasury will make some adjustments. So, I do think that there will be withholding. We’ve just been a little bit more conservative until we see more activity on that because it is a difficult process. 

Tim Hoyle 10:53 

Dan, the shock-and-awe fiscal policy happening in the first quarter and the second quarter is just one of four catalysts that you see happening near-term. The other one being the Supreme Court decision, which could occur today, Friday, the 9th. The third would be the appointment of the new Fed chair. And the fourth is this “Donroe Doctrine,” Donald Trump’s Monroe Doctrine and reasserting influence in the Western Hemisphere. Can you talk about how those four catalysts, how you see them playing out over the next six months? 

Dan Clifton 11:27 

Yeah. So, awesome question. So again, I think the backdrop for economic policy is as good as I’ve ever seen it. It’s big, it’s bold, it’s not fully inflationary, and you’ve got a nice productivity tailwind that’s developing here that makes it a little bit easier to absorb, but it’s not all roses, Tim. There are definitely headwinds there. And something that I’ve always stressed to my clients is, the first year of a presidency is very different than a second year of a presidency. The President is going to be far more populous starting in two weeks from now when he goes to Davos in Switzerland and outlines an extremely populous agenda on electricity rates and healthcare and housing. So, you’re going to have to get used to that, and you’re already starting to see it. He’s talking about banning institutional ownership of home sales, ending dividends and share buybacks for defense companies so that they invest. So, you’re starting to see the early stages of that. And so, the rhythm of the first year of the Trump presidency is going to change. And then second is, now you’ve got this Supreme Court decision on tariffs, and the Supreme Court decision on tariffs can be like, “Hey, Trump, you don’t have the authority to do this.” Now, from my vantage point, that’s another $250 billion tax cut because you’re getting rid of those tariffs, but the bond market’s going to look at that differently, and they’re going to look at it as an additional $250 billion deficit increase that they were not provisioning for. And could that raise bond yields? And what we’ve been arguing, Tim, is that the President has the authority to resurrect these tariffs, and he can move pretty quickly. It’s not going to get them all, but it’s a legal way of being able to do it. He can get about 80% of what he wants initially, but that’s going to create uncertainty for companies. What rate am I collecting? How am I doing this? These rates were X under the old system, now they’re Y under the new system. So, you can see how there could be some uncertainty that resonates from that decision if the Supreme Court does throw those out. The second is on the Fed Chairman. Now, I believe that what’s happening at the Fed is very important for our shock-and-awe thesis on economic policy. The Fed is now more worried about employment than they are about inflation, and that’s a very big change from 2025. There were two media reports, New York Times and Wall Street Journal this week, making the claim that tariffs reduce employment more than they raise inflation. And it’s not by accident that those articles are there. And what we call that is a turtle on the fence. The turtle just did not get on the fence by itself. It’s impossible. Somebody put that turtle on the fence; that’s the Fed putting those articles in major media publications that give them the flexibility to be able to lower rates. And as those tariffs begin to run off on a year-over-year basis, they’ll have some cushion. And as you know, in December, the Federal Reserve has announced that they are expanding their balance sheet by $57 billion per month while all this consumer stimulus is coming out. So, policy is broadly accretive. Now what’s going to happen is that you’re going to get an announcement in the next couple of weeks where a new Fed Chairman is going to be selected. And there’s going to be questions about whether that Fed is independent. There’s going to be questions about how fast the Fed wants to pull back its balance sheet, which could be different than the current Chairman, and whether the Regional Presidents are going to be able to remain in their current role if there’s enough members on the Federal Reserve to begin to remove those Regional Presidents. So, there will be a bit of an uncertainty that comes associated with it, but I like to joke, there’s probably no worse job in the world to have in July of 2026 than to be the Fed Chairman, the new Fed Chairman appointed by Trump going into a midterm election, the economy is accelerating and him putting pressure on you every day that you need to be able to cut rates. Now, in all fairness, the two Kevins, as we call them, Kevin Hassett and Kevin Warsh who are the top two contenders, they are literally arguing that we are in a productivity boom. And if you’re in a productivity boom, that means that where the Fed funds rate could be is actually lower than the current consensus estimates and that there’s a real possibility that rates can go lower without stoking inflation. And that’s going to be the test, and that’s going to be where some of the uncertainty comes from because most of the modern economics profession is not. 

Tim Hoyle 15:57 

The fourth pillar of economic policy that’s kind of driving the narrative in the first half is what’s happening now in Venezuela, all the narrative around Greenland. Can you give us some insight into what the end game is here for the Trump administration? 

Dan Clifton 16:14 

Yeah. So again, I think what’s happening here is really important, and I’m very glad that we kind of segregated this question out rather than with the other questions because I do think that it deserves a lot of attention. On December 2, the Department of War, or Department of Defense as we used to call it, issued what’s called a National Security Strategy. And it was very different than the first Trump term and very different than Biden’s National Security Strategy because instead of going after China and Russia, it talked about this idea that the Western Hemisphere needs to be shored up, that our enemies, countries that are trying to undermine the US, are operating now in nations in our own backyard. And Venezuela was probably the worst actor of those three. You had Iran, China, and Russia all operating in those countries, plus the Cuban influence at the same time. So, there’s a belief that there was an Iranian drone factory that was in Venezuela. Those are way too dangerous to happen. And the central thesis is when the Berlin Wall went down, the world globalized, it became unipolar US leadership. Now we’re moving back to a multipolar, China exerting its influence, Russia exerting its influence. You almost have to basically shore up your backyard before you could project strength outward. And so, you can understand why Venezuela is so important to the chess board because if you can take control of that or at least get that influence out of there, then it makes it harder for our enemies to be in Columbia or be somewhere else. Panama is another good example and making the fake IDs or the fake passports and the weapons and all the things that are done to undermine us. So that’s why Trump is keeping the existing regime in place but using oil as a tool. And he’s like, “If you don’t do what we need you to do, and you allow Cuba and Russia and Iran and China to be here, we’re just going to cut off your lifeblood, and that is the oil.” And so that’s why they actually think they’re going to get some cooperation. Your best press day is always your first day, and that was last Saturday. So, it only gets worse from here. I don’t want to make it sound like roses, but think about what happens if you now have all this U.S. production, the Saudis are pumping, and you get the Venezuela oil. You don’t even need to increase it. You just need to be able to market it better. Now you’re talking about a $50 barrel of oil that makes it much harder for Putin to exist as war machine, and it allows Trump to actually have some leverage in those Trump-Ukraine negotiations and start bringing an end to the war. Just this week again, Trump gave the green light for the Senate to put sanctions on Russia, which are pretty biting secondary sanctions, a big, big change, almost like he needed the Venezuela change to happen. Now, if you think about China, what’s one of the biggest questions that are out there: Is China going to go after Taiwan? And I think what Trump is doing here is that he’s making it more difficult for them to do a blockade or more difficult for them to go after Taiwan because he’s not only going after Venezuela oil, he’s now going to be much more aggressive with Iranian oil. It’s almost like Trump needed all this other oil to be able to start taking the Iranian oil offline without spiking U.S. prices. Now he’s got the ability to do that. And if China doesn’t have access to Russia and Venezuela oil, I mean Iranian and Venezuela oil, it makes it much more difficult for them to achieve their objectives in Asia. So, I view this almost as like Trump going after the choke points of Russia and China rather than going after Russia and China directly, and it has a larger significance. Okay, maybe that’s true, maybe it’s not. Some people will disagree with me, but what does that have to do with Greenland? And if you look at what is going on in Europe right now, just about every European leader has given a speech this week in very negative tones about Trump and what US policy is. Again, the National Security Strategy was very negative on Europe. The vice president, JD Vance, is very negative on Europe, but Greenland’s extremely important. If you think about the U.S., the U.S. is separated by two oceans. It’s very hard to attack the US. That’s been our natural advantage. Well, Russia and China bought a lot of what are called icebreakers and you almost feel their pressure coming. And if the polar caps are really starting to melt, it’s going to make Greenland the most important area on the geopolitical chess map. And the U.S. has a military base there. You can argue that all it takes is a negotiation. I’m sympathetic to it, but I almost feel like what Trump is saying is this is way too important for the security of America to be dependent on other countries to be able to do this. And that’s probably where he’s taking it from, or at least trying to get some sort of negotiation for a better deal overall. By the way, I think there’s a natural resource angle to all of this. I don’t think it’s the sole angle. I think it’s the defense of the U.S., and he feels that something’s coming. Again, Trump this week basically said that he wants to ban share buybacks of dividends for defense companies. That’s him saying, “I don’t think that you’re building the munitions that we need in case of an emergency.” He’s putting the U.S. on a war footing. That’s what he’s doing. Not saying that we’re going to have a war, but preparing if China did something or if Russia did something, that we’re more prepared for that. Now you think about Greenland, they have the best rare earths. The Venezuela rare earths aren’t exactly the best. In Greenland, they’re the heavy, and it requires massive levels of investment to be able to get those out of the ground. And I do think that that’s going to be a big component of why you would want Greenland as well. But at the end of the day, he could be trying to get Greenland to declare its independence from Denmark, and then they need the money. I mean, Denmark doesn’t really have any debt, doesn’t really need the money if we wanted to buy Greenland. But if Greenland becomes an independent state, then you probably are going to get a much better deal out of that. And that’s probably something that’s driving it. 

Tim Hoyle 22:47 

Well, how do you handicap the outcome there? Where do you think this ends up? 

Dan Clifton 22:53 

I think that there will be a negotiated deal between Denmark, the European Union, and the U.S. that will be both over the security of Greenland, the amount of U.S. troops that are there, and the amount of resources that are going to be available. What Trump has done very well is be able to secure and procure rare earths. He’s almost treating it like the COVID vaccine in 2020, where he created this amazing supply chain to be able to get the vaccine out. It feels like that’s what they’re doing with rare earths. The problem is that at the end of the day, those rare earths got to be refined in China. So, I’m looking for where we’re actually going to wind up refining the rare earths. That’s going to be the important change that happens. I think that’s probably going to be part of the process in some of these countries that he’s dealing with. 

Tim Hoyle 23:36 

And like any kind of manufacturing, it’s probably environmentally not feasible. And there’s a NIMBY aspect to this too, right? You don’t want a rare earth refining capacity, so it needs to be put somewhere there. That’s a great question for the end game. There was a government shutdown, the longest in history a few months ago, and there’s chances that it occurs again because the main point of that shutdown was healthcare subsidies, I believe. And it doesn’t seem like we’ve solved any of the long-term issues here. What do you see happening along the lines of the ACA and the healthcare subsidies in 2026? 

Dan Clifton 24:18 

Yeah. So, I think there are two different questions, which is what’s going to happen on the government shutdown and what’s going to happen on the ACA subsidies. Now, there is a bit of a convergence between them, but if you listen to Senator Schumer, he’s saying that they don’t plan on shutting down the government over the Affordable Care Act anymore. That fight’s been done. That message is there. We don’t have any data on enrollment other than the first week, which was in line, but we can look at some of the state enrollments. We looked at Pennsylvania yesterday, enrollments down probably 12%. So, the Democrats think that they’re in a position, one where if healthcare premiums go up, Trump’s going to take the blame. And number two is that there was a very high cost to Democratic constituencies from that first government shutdown, and there is not really an appetite amongst 10 Democratic Senators to shut down the government again. So, I think Schumer realizes that. What we are doing is that you have appropriation bills. Those appropriation bills fund the government. When we reopen the government at the end of last year, three of those appropriation bills passed. So that means that you’re now moving into a partial shutdown if you shut down on January 30, not a full government shutdown like we saw. Yesterday, we had a vote in the House of Representatives. We got over 370 votes in the House for another three appropriation bills. So, we are on a path as of today, January 9, where about half the government will be funded or about 40% of the government will be funded, and we have six more appropriations to go. Where I think that there’s going to be hiccups is that number one, there’s a climate change center that’s being shut down in Colorado that’s existed for a very long time that raised some concerns amongst the Colorado Democratic Senators and at least delayed some of those appropriation bills. You’ll see issues like that emerge, but I think there’s a larger issue emerging over what’s going on in Minnesota right now and the really tragic events that unfolded this week with the death of someone where I think Democrats are saying, why would we fund the Homeland Security and the Custom Border Protection if they’re killing Americans? And so, you had a shooting in Oregon, you had a fatality in Minnesota. You can argue one way or another whether it was justified or not, but I think from a Democrat’s perspective, they’re starting to question whether to fund that specific portion of the budget, and I think that will be important for the end game itself. Then on the ACA subsidies, which again, I think you’re starting to see the contours of a potential deal. We did something extraordinarily rare in the House of Representatives called a discharge petition. The discharge petition says if 218 House members sign a petition for a piece of legislation, it will trigger a vote on that legislation. And so, what you had was a handful of Republicans joined with all the Democrats to trigger a vote on the Affordable Care Act subsidies. And yesterday you had 17 House Republicans vote with the Democrats to move the three-year extension of the ACA subsidies to the United States Senate. Let me be clear what we did when that happened. The Speaker of the House lost the control of the House of Representatives by a minority of his members joining with the Democrats to trigger that vote. And we often say that a discharge petition is stuff made for like Legally Blonde 2 with Reese Witherspoon where it got famous like in the movies. It’s not really something that happens in a live legislative agenda like this. And then at the same time, you had a handful of Republican senators voting to limit Trump’s war powers yesterday. If you were split screening it, you’re starting to see that kind of Republican unity of year one starting to crack here in year two. So, the House Bill will never pass the Senate. The Senate has to come up with some way that they’re going to fashion these ACA subsidies and send them back to the House of Representatives, and then you got to go through the process again. So, it’s going to be arduous. And one of the real major sticking points here is what’s called the Hide Amendment, which says that taxpayer money can’t be used for abortions. And it’s not existed on the ACA. And the Republicans are going to insist, if this bill moves forward, that there’s actually some sort of restrictions on the ACA for that. And that’s going to be very controversial. So that’s why I don’t say it’s guaranteed, but this thing is moving. I mean, it’s moved through the House, you’re going to have a Senate bill and those probabilities are changing overall on this. So, I just think there was a lot of uncertainty in healthcare last year, very hard to price. What is Trump going to do on tariffs for pharma? What is Trump going to do on price controls on pharma? What is RFK doing to the National Institute of Health, which impacts life science tools? What’s going to happen to ACA? What’s going to happen to Medicaid? None of that was known. And so, investors just shed that. Why would I invest in healthcare when I could be in AI or energy that powers AI? Now what you’re starting to see is now you could start to put bookends around outcomes. You know that tariffs are delayed for three years, the price controls are on Medicaid, not Medicare, which is much less. NIH spending is back to normal, and you’re starting to see some sort of resolution on the ACA subsidies. I just think that investors are starting to feel a lot better about healthcare right now than they did in 2025. 

Tim Hoyle 30:09 

We saw healthcare rebound significantly in the fourth quarter. Starting in the end of third quarter, you’ve seen a major repricing of healthcare. So, this is a great segue to the elephant in the room. It’s a midterm election year, lots of market volatility and news flow because of that. Am I right in saying that there’s 30 House Republicans that aren’t seeking reelection this year? And is it also safe to say that your models predict that the Democrats win 20 to 40 seats in the House as of today? 

Dan Clifton 30:47 

Yeah, so there’s a lot there. So let me just take one step back on this. Presidents generally lose in their midterm election years. What happens is you get complete control of the government, you effectuate your agenda, your base basically goes back to their life, and the other party is so outraged at what you’re doing, they become extremely motivated to vote. It’s very systematic how these elections happen. And it happened with Obama in 2010, and it happened with Trump in 2018, and it happened with Bill Clinton in 1994. And you already see this happening. So, we’ve had 30 special elections. I’m sorry, we’ve had 40 special elections since Trump won his second term. And the Democrats have gained seats in gained progress in 34 of those 40 seats and by an average of 10%. You saw it in Virginia and New Jersey where huge Democratic turnout, complacent Republican turnout. So, we know that it’s not about the economy, it’s about intensity, and the Democrats have all the intensity. What Trump has to do is start reworking where that intensity comes from. So, look at all this fraud that the Democrats are permitting in Minnesota, and they extend it to other states. They’re going to have to try and create these bogeymen, not so much bogeymen but these type of villains to be able to motivate their base and see if they’re going to get success from that. We can monitor it over the course of the year through special elections and other factors. But what we have found is that the president’s approval rating is a really good predictor of the number of lost seats. So, we can look at the margins in the special elections, we can map them out, and it suggests that 30-seat loss. We can look at the president’s approval rating and we can map that out. It’s like a 30-seat loss, maybe a little bit higher. So, the metrics that are tried and true are right there. Now that could change. The Supreme Court is going to make a decision on what’s called the Voting Rights Act. They may throw the whole Voting Rights Act out. And if you do that, districts are going to get redrawn, and they’re probably going to become more Republican districts. At most, they can get about 19 seats for that. Some of the states have already reached their filing deadline. So, the Supreme Court is on a very expedited path here to get this decision out ahead of some of those filing deadlines. But even if it’s at 30-seat margin and then they gain 19 seats, the Democrats are still gaining 11, and they only need three seats to win the majority. So, you look at it, the risks for the Republicans are much greater than the opportunity here. And you mentioned that there’s retirements, there’s just a lot of other factors that are going on. And so, the administration had a very concrete plan, and their plan was that we’re going to get the economy humming, and we’re going to run it so hot that people feel better. And that’s a great idea. Every other president has had that idea, and they’ve all been successful in getting economic growth to accelerate their midterm election year, and they all ended up getting wiped out in their midterm election year because it’s about intensity, not so much about the economy. So, they’re going to run it hot. Now what’s very interesting to us is that despite the economy accelerating in the midterm election year, the worst performing year for the stock market is that midterm election year. And by the way, I’m not bearish in any way. I’m sitting here telling you shock-and-awe economic policy growth. But what we realize in midterm election years is that you get these large intra-year S&P 500 selloffs. On average, it’s about 19% in a midterm election year. In year one, three, and four of a president’s term, it’s about 12 or 13%. So, there’s something different happening in that midterm election year. And we think it’s three things. Number one, presidents get what they want done in year one, and the economy accelerates, the market prices it in by the time you get growth. Number two, the market starts to realize the other party’s going to win. They start to handicap that. And number three is that it becomes a really, really negative tone during the midterm election cycle, which impacts sentiment. And you could see that already happening. I mean, it’s the first week of January, and it just feels like domestically our politics are on the cusp here. And it’s made it harder to digest truly the revolutionary stuff that’s happening in Iran right now. If you watch these protests that are happening, they’re massive. This could be one of the biggest events of our lifetime if the Iranian government falls. And yet, at the same time, we’re dealing with our own domestic politics. So, it just tells us that there’s massive unease globally amongst voters that are happening overall, and that’s going to play into sentiment. Now, Tim, as you know, the second term of a president isn’t as bad for that inter-year decline as the first term. So, if you call this the president’s term, maybe it’s not as bad. And second is that it’s all temporary because the S&P 500 has not declined in the 12 months following a midterm election since 1938. I’ve probably jinxed it by telling you that, but you and I, we’ve known each other for 20 years, and every election cycle, I say there’s going to probably be a bit of a selloff here. And there’s always a reason. In 2022, it was Biden’s inflation. In 2018, it was Trump’s trade war. In 2010, it was the second coming of the financial crisis, and all of those end up getting resolved. And so that midterm weakness has historically been a very good opportunity for investors. And we’re just like, “Hey, be tactical. Go where the money is flowing this year, and go where Trump is telling you this year, consumer refunds, housing.” Those are all going to create opportunities, but on the other side, there’s a pot of gold. 

Tim Hoyle 37:02 

Dan, you’ve pointed out, too, that I think paradoxically, because healthcare is always such a political issue, that healthcare actually stocks tend to do very well in midterm election years, don’t they? 

Dan Clifton 37:15 

And again, this is a historical pattern. It’s not a forecast, but healthcare has outperformed the S&P 500 in every 11 of the last 13 midterm election years, that we have sector information for 13 midterm election years, and healthcare’s outperformed in 11 of those 13. And the average outperformance is 8% relative to the S&P 500, and it’s really the only year to make outsized macro relative gains in healthcare to the S&P 500. And so, the market just generally gets more defensive as you get into midyear. What’s interesting to us is that this year has started off almost perfectly like the historical average. The S&P has trended perfectly as it does in the first year of a presidency. The NASDAQ relative to the S&P 500, almost perfect, and that tends to underperform in the first half of this year, value outperforming growth, the industrial sector looks exactly like the historical average, materials look like the historical average. So, you’re getting this cyclical recovery pricing in from this shock-and-awe economic policy. But as you start to get that growth and the market begins to anticipate the punch pole’s going to be taken away, as the political debate starts to take off, just generally gets a lot more defensive. That’s going to be healthcare and the consumer are our favorite areas to be in while you’re in that defensive space. 

Tim Hoyle 38:47 

Dan, while we’re on the election and the topics there, it feels like affordability is going to be the main topic. And you talked about how Trump is most likely going to pivot towards more of a populous message over the next couple of weeks. Are the policy initiatives that were, I think, announced just yesterday around trying to bring mortgage rates down, are they going to be effective, do you believe? 

Dan Clifton 39:11 

So, yes and no. And so, first, I think there’s going to be a very aggressive message from Trump on affordability, but they truly believe that once all of this economic policy hits that was done last year, but actually gets implemented this year, that’s going to be the driver of the economy, the tax refunds, the capital investment, the lower rates that are going to ensue. And so, the big delta here for the new initiatives for ‘26 is the bank deregulation that we spoke about before, getting banks to invest in mortgage-backed securities and driving down mortgage spreads relative to Treasury, which should lead to lower mortgage rates. And what you saw from the president yesterday announcing that the government-sponsored enterprises, Fannie Mae and Freddie Mac, should increase the retained portfolios by buying $200 billion of mortgage-backed securities, very important. The Federal Reserve has $200 billion of mortgage-backed securities rolling off this year. The GSEs are basically taking that up. And I do believe that they will help get mortgage rates lower when you combine financial deregulation with the Fannie Mae, Freddie Mac mortgage-backed security proposal. I think it’s that one, two punch that will be important. And if you see mortgage rates come down from 6.1% today to 5.5% midyear, that’s going to be really important in starting to unlock the housing market overall. That doesn’t mean that that’s their only housing proposals. They’re going to have a series of other proposals that they’re going to release at Davos. So, one of them is going to be what’s called an assumed mortgage. We think that they’re going to propose an assumed mortgage. That would say that if you buy an FHA loan, you can assume the mortgage rate of the person who’s there. There’s got to be a lot of complicated legislative changes to make that program work better. Those are going to be changes on the margin, increasing the supply of housing by providing federal land to be used for housing. Another idea is allowing you greater flexibility over your 401k or your education savings account to make a down payment. You’re playing into, how do I make it easier for younger people to be able to buy a home if they have money that’s locked up for the next 30 years or so? So, I do think that you’ll see that. I think about electricity, and they’re worried about electricity prices. We’re seeing it play out across the country. And if you’re going to win the AI race, which is what Trump’s plan is, to win the AI race, you’re going to need a lot of energy on that. And there’s certain areas where if you build an AI data center, it’s completely removed from what a homeowner will face. But if you’re in the Northeast, and you’re part of the PJM interconnection, there’s no separation from that. So, they’re working to figure out how to keep rates low and still build out these AI data centers that are going to need a lot of energy. And I do think that it’s increasingly taking up a larger portion of our state policymakers’ time and bandwidth in trying to figure that out. 

Tim Hoyle 42:27 

That’s a great question. One of my questions, Dan, was around nuclear power regulation. Today, Meta announced super ambitious deals with three nuclear power generators, some of these new advanced small modular reactor companies, but is the regulatory framework there for this to actually happen? How do you see that playing out this year? I guess all the way through 2030 is really when these things might actually come online. 

Dan Clifton 42:59 

Yeah. So, I think both it’s the regulatory and the technology both have to come online. So, listen, it’s just like housing, right? You’re going to have some immediate proposals, and you’re going to have some longer-term proposals. From my vantage point, I’m like, well, natural gas. How do you get natural gas to the site better? And I think that you’re going to see a big push on pipeline permitting and trying to get those permits better. Never easy. FERC at the federal level can only do so much before the state agencies get involved. You may need a compromise deal in Congress, which is very difficult to do to be able to do that, but that’s one way to do it. I would not be surprised if you see companies like Meta and others saying, “Hey, we’re just going to build this off grid and do it ourselves.” It’s going to be cheaper and more politically palatable to be able to do that and then basically build the sources out. So, I do think that that’s going to come. I’m very big into nuclear. You look at the 2021 infrastructure bill, you look at the 2022 “Build Back Better,” both of them had tax incentives for more nuclear deployment. You’re now starting to see that come to fruition, but there’s a view that some of this small technology is still five years away, four years away, and it’s going to take some time to be able to get there. And so, it’s a race. China’s using its coal facilities, and we’ve taken a lot of those offline. I think the administration’s going to deploy every single possibility of fossil fuels to be able to get there. The Democrats are going to stand up and say, “Hey, wait a minute here. You’re taking off all this wind and solar, and it helps you get to where you need to be to be able to power those data centers.” And so, if you are going to do a permitting deal, and you do need Democratic support, their big ask is going to be putting at least some of those canceled projects for solar and wind back online. And the administration’s got to make a decision whether how important is permitting if they’re willing to make that compromise overall. So, none of these issues are going to be very easy, but they’re critically important. The country that wins the AI race will basically determine the next generation. And I think the US is committed to winning it, but to do that, you have to have a comprehensive energy plan, and these are not easy issues to solve. 

Tim Hoyle 45:15 

One last topic I wanted you to – and thank you so much for your time today. One last topic, which is the dollar’s status as a reserve currency. You spoke yesterday about how the dollar has just, the path that the dollar has taken over the last 18 months is exactly what happened during the first Trump administration. Can you talk a little bit to how the GENIUS Act has evolved and how you think that the dollar’s strength will persist or not persist into the future? 

Dan Clifton 45:51 

Yeah. So, I think there’s cyclical factors and structural factors that are important for the US dollar. And where we were in 2020 to 2024 was in a very elevated US dollar. So, a decline from here was going to be natural, and we’re settling in the 2015 to 2019 range. And so, every day I wake up, and the media saying the dollar’s completely falling off, and I’m like, okay, we’re falling back to 2018 levels. I’m okay with that. So, in the cyclical, the dollar weakness is very consistent with what you would think. Yesterday, we were remarking how amazing it is that the US dollar in 2025 was the exact trend of the US dollar in Trump’s first term, first year of 2017. It’s the same chart, 11% decline, and it fits perfectly. So, there’s those cyclical factors. But what has been happening really since the sanction regime from the Ukraine-Russia war, where we started to begin to seize properties, yachts, Tuscan villas, we began to see a diversification from our allies like Israel and Europe away from Treasuries at their central bank holdings. And it was very small at first, but they’re diversifying away from US stuff with gold. And that really began to accelerate on April 2. April 2 was the day that Trump put out all of his tariff proposals. And what we’ve historically seen is a 15-, 20-, 25-year history that when the dollar goes down, the central banks buy more Treasuries, and that just ended on April 2. So now with gold’s appreciation in price, you’re now starting to see that the amount of gold holdings at central banks is almost the amount of Treasury holdings at central banks, which is a very, very big movement that’s arising overall. That does not mean that there has been less appetite for the US dollar amongst foreigners. We’re talking about foreign central banks. In fact, we’ve actually seen some strength coming from foreigners on purchases of U.S. Treasuries. And we think some of that is exactly what you’re relating to, but only going to grow by what you’re relating to. And that’s the GENIUS Act. The GENIUS Act will really start to get implemented in 2027, but the GENIUS Act is stablecoins, and that passed last summer, and stablecoins has to be backed by dollar-denominated assets, in particular going to be UST bills, Treasury T-bills. And so, what will happen is that there are parts of the world that have hard to get access to US dollars. And there’s these little kiosks where you can go get a stablecoin. And so, when I look at the stablecoin legislation, I never really thought about it at a U.S. perspective. Why would I buy a U.S.-backed asset I can’t collect interest on? But if I don’t have access to the U.S. dollar, and now I do, I don’t need the interest, I just need that currency. And so, I think that that’s going to be a stabilizing force for the U.S. as a reserve currency. It almost like internationalizes fully the U.S. dollar and I think is an important change. But what I see from Trump is that he needed that backup, that cushion, because he does want a weaker dollar. And what I was arguing, I’ve been arguing, is that there’s really three steps to the Trump plan. And that first was tariffs, and that’s basically done at this point. The second is onshoring through these business tax incentives and getting more factory building. And when that ends, they would not be disappointed with the cyclical dollar moving closer to the 2003 range that we had at the beginning of the Bush administration. And if that happens, that’s a regime change for asset allocation of what you would want to own. And it would actually start to favor value stocks, which was a, it’s a widow trade for the last 25 years or so. It would really start to put a bid back into some of these non-U.S. stocks and the emerging-market stocks that you haven’t seen in a long time. So, I would just keep an eye on it. You get that weaker dollar, you’re going to get more of that manufacturing that you asked about before. And so, what I’m anticipating is a weaker dollar, less central bank demand for dollars and Treasuries, but a system that keeps the U.S. reserve currency in place with that weaker dollar overall, and a lot more talk about de-dollarization that’s going to happen. And if that’s the case, there’s going to be a bid for commodities. And overall, our final, our overall thesis is we’re moving back to the period that it looked like before the Berlin Wall went down: slightly higher inflation, slightly higher interest rates, more geopolitical volatility, but more domestic development in the U.S., more Canada and Mexico development. And with that, a quest for more materials, raw materials, like we were talking about before. 

Tim Hoyle 51:03 

Dan, you’ve left us with so much to think about, and as always, you’re super insightful. And I learned so much every time I get to talk to you, and I know the clients just enjoy this so much. So, I want to take this time to say thank you. It’s been the quickest hour of the week, for me at least. And I want to say thank you to all of our clients for participating in this podcast. And as Hank would say, stay bullish. 

Hank Smith 51:32 

That was a fantastic discussion, and I hope you enjoyed it as much as I did. My thanks to Dan for sharing so many insights with our listeners and to Tim for expertly guiding the conversation. Thank you for listening to this episode of “Speaking of Quality.” Our next episode will be released shortly. In the meantime, please send suggestions or questions for me or the Haverford Trust team to podcast@haverfordquality.com. And don’t forget to subscribe, rate, review, and share this podcast. Until next time, I’m Hank Smith. Stay bullish. 

Maxine Cuffe 52:11 

Thank you for listening to this episode of “Speaking of Quality” with Hank Smith. To hear future episodes of “Speaking of Quality,” please subscribe on Apple Podcasts, Spotify or wherever you listen to podcasts. To learn more about The Haverford Trust Company, please visit https://haverfordquality.com/. This podcast is provided as general commentary and market overview, and should not be relied upon as research, a forecast or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt an investment strategy. Any opinions expressed are as of the date this podcast was recorded and may change at any time and are the opinions of that commentator, not Haverford. Any opinion or information provided are believed by Haverford to be reliable at the time of this podcast’s recording, but are not necessarily all-inclusive or guaranteed for accuracy. Before making any financial decisions, please consult with an investment professional.