November Market Update: What the Midterm Election, Budget Deficit, and National Debt Mean for Your Portfolio

November Market Update: What the Midterm Election, Budget Deficit, and National Debt Mean for Your Portfolio

With midterm elections underway, many investors are watching closely to see how Congressional control may shift. Forecasts currently point to a divided government as the most likely outcome, given that Republicans hold slim majorities in both the House and Senate.¹ While a change in party control would mark a shift from the past two years, divided government is actually quite common, especially during midterm cycles.

One thing is clear regardless of the election outcome: the federal budget deficit, meaning the gap between what the government spends and what it collects in revenue, grew to just under $2 trillion over the past year. That is its highest level in absolute terms since 2021.² These fiscal challenges are likely to persist no matter which party leads Congress, since rising interest costs and entitlement spending have built up over many decades. The result is a national debt that has now surpassed $40 trillion, or more than 120% of the size of the entire U.S. economy.³

For investors, these headlines can feel unsettling. Keeping a long-term perspective and separating political concerns from investment decisions is key. Here is what investors should know this political season.

The federal budget deficit has grown significantly in recent years

The federal government recorded a $1.99 trillion deficit for the fiscal year ending September 30, 2026, up 12% from $1.78 trillion the prior year.⁴ In simple terms, the government spent $7.4 trillion but only brought in $5.4 trillion through taxes, tariffs, and other sources.⁵ To cover the difference, the government borrows money by issuing Treasury securities, which are purchased by investors and institutions around the world.

Based on current economic output, the latest deficit is expected to be around 6% of GDP (Gross Domestic Product, a measure of the total size of the economy), similar to the 2025 ratio.⁶ Historically, the budget deficit has averaged about 4% of GDP, with larger gaps occurring during major crises such as World War II and the 2008 financial crisis. Over time, these annual deficits add to the national debt, which surpassed $40 trillion for the first time in August. That works out to roughly $117,707 per American, or $298,606 per household, according to the Congressional Joint Economic Committee.⁷

Government shutdowns have historically had a limited impact on the stock market

There are two near-term issues worth watching. First, the national debt is approaching the statutory debt ceiling of $41.1 trillion set by the One Big Beautiful Bill Act last year, which could be reached by mid-2027.⁸ The federal government also faces a budget deadline of December 11, shortly after the midterm election. Raising the debt ceiling will likely be a central debate for the next Congress, and if an agreement is not reached in time, a government shutdown could occur.

While shutdowns can create hardship for federal workers and cause short-term market swings, major stock market indexes have historically stabilized quickly, even during long shutdowns such as those in 2018 and 2025. The chart above illustrates this pattern. Second, rising interest rates are adding to the government's fiscal pressure. The 30-year Treasury yield has remained above 5% since June, meaning that as older government debt matures, it must be replaced with new borrowing at higher rates. This increases the government's interest payments and widens the budget gap. The Treasury Department has intervened by purchasing Treasury securities to help keep U.S. interest rates stable.⁹

Policy uncertainty tends to create short-term market swings, not lasting downturns

The national debt is a long-term challenge with no easy fixes, since any solution involves difficult decisions around taxes, spending, and entitlement programs. At the same time, policy predictions have often proven inaccurate. For example, the market decline following last year's tariff announcements was shorter than many anticipated, and markets went on to reach new all-time highs.

As the chart above shows, uncertainty around economic policy has contributed to short-term market swings in recent years, but these periods have typically been brief. What tends to matter more over the long run are underlying factors such as corporate earnings, interest rates, and broader economic trends. For investors, focusing on these fundamentals rather than reacting to political headlines is generally a more sound approach.

The bottom line? The midterm election and the growing federal deficit are important topics, but history shows that long-term portfolio outcomes are driven by fundamentals rather than by political outcomes.

References

1. https://www.realclearpolling.com/latest-polls 

2. https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/ 

3. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/ 

4. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/ 

5. https://www.realclearpolling.com/latest-polls 

6. Clearnomics research using U.S. Treasury and Bureau of Economic Analysis data, as of October 23, 2026

7. https://www.jec.senate.gov/public/index.cfm/republicans/debt-dashboard 

8. Clearnomics research and U.S. Treasury data, as of October 23, 2026

9. https://home.treasury.gov/news/press-releases/sb0607 
 

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