All Eyes on the Capitol as Midterms Approach


All Eyes on the Capitol as Midterms Approach

Ed Mills, Washington Policy Analyst, Equity Research, surveys the current political landscape and the upcoming midterm election.

October 2, 2018

To read the full article, see the full Investment Strategy Quarterly publication linked below.

We are in the final stretch of the midterm elections that we view as a proxy in the fight between President Trump’s agenda and the electability of Congressional Democrats. Multiple themes will be given considerable attention in the coming months. In terms of the potential electoral outcomes, we will be paying particular attention to the political environment vs. the electoral map.

The political winds are at the Democrats’ backs, but the distribution of Senate races, the partisan tilt of many House districts, and positive economic indicators could limit Republican losses. That said, we view Democrats as favored to win a majority of seats in the House of Representatives and Republicans favored to maintain control of the Senate. By historical standards, an average midterm election would produce a Democratic majority in the House.

Democrats need to net two seats for a Senate majority after November’s election. In our analysis of these races, we see 11 competitive races in seats currently held by Democrats and only four in seats held by Republicans. Wave elections (an election in which a party makes major gains) can swing these competitive seats in one direction, but Democrats face an uphill battle to retake the Senate.

House and Senate by the Numbers

Members of the House of Representatives serve a two-year term, and all 435 members are up for re-election in November. Republicans currently enjoy a 44-seat majority with 237 seats compared to 193 seats for Democrats. Five seats are currently vacant. The party with at least 218 seats has a majority in the House.

Senators serve six-year terms and one-third of the Senate is on the ballot every two years. This year, that number is elevated to 35 of the 100 senators due to an early retirement and resignation of two senators. Republicans hold 51 Senate seats, while Democrats hold 47 (along with Bernie Sanders and Angus King, two independents who caucus with the Democrats). Given that Vice President Pence serves as a tiebreaking vote, Democrats would need to net two seats for a majority following November’s election.

Although gaining two Senate seats appears to be an easily achievable target in the current political environment that suggests a Democratic tailwind, Democrats are defending 26 Senate seats compared to nine for Republicans. Ten Democrats are running in states won by President Trump, including ruby red states like North Dakota, West Virginia, Montana, and Indiana. Republicans are only defending one seat in a state won by Hillary Clinton (Nevada). Structurally, Republicans have the advantage to maintain the majority in the Senate.

The midterm elections are historically challenging for the incumbent party. Since 1938, the party holding the White House has lost seats in Congress in all but two midterm election cycles. The average loss for the incumbent party is 26 House seats.

Projection and Outlook

Based on the current trajectory and historical comparisons, our base case for the 2018 midterms is Republicans retaining a Senate majority with the House switching to Democratic majority control. A Republican Senate and a Democratic House could potentially create a Goldilocks scenario for the market: not too hot, not too cold. We strongly believe that the strength of the market since President Trump’s election has been tied to his deregulatory agenda.

The Senate alone confirms Presidential nominees, which require a simple majority vote. A Republican Senate equals a continuation of the Trump deregulatory agenda. In the House, we would be looking for potential breakthroughs on immigration, infrastructure, and a potential fix to the State and Local Tax deductions as possible agenda items. Divided government is likely to produce spending bills that keep domestic and defense spending at or near current levels, continuing a legislative agenda that supports fiscal stimulus. Should the Democrats retake enough seats, a key concern for the market would be increased oversight by the House.

Caveats to consider to the current forecast are candidate recruiting, the strength of individual candidates, new district maps, and the strength of the economy, which could serve to limit potential Republican losses this fall.

Read the full October 2018 Investment Strategy Quarterly
Read the full October 2018 Investment Strategy Quarterly

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change.

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