With one week left to go before the U.S. mid-term elections, one thing has been made clear: the Republicans are poised to re-take the House. The Senate, however, is too close to call but trending Republican.  We’ll touch on how this may impact the markets if it comes to pass, but remind our readers that polling has been anything but predictable in recent elections so they should prepare for the unexpected.  While we may see a knee-jerk reaction from the markets, we are more focused on the long-term trends bubbling underneath the surface.  In the meantime, our resident U.S. political guru, Marc Purcell, has kindly provided a summary of the key drivers behind this year’s mid-terms.

 

Every mid-term favours the party out of power. At the beginning of the year there was a very high likelihood of a red wave. That momentum stopped in the summer as the U.S. Supreme Court handed down its Roe decision and energized Democrats. However, in recent weeks that momentum has shifted as Republican voters “come home” as the conversation has shifted from social issues to economic and personal safety issues. The key to this election is turnout. Republican turnout in mid-term elections tends to be older and whiter than in general elections. Democrats try to target younger voters but as political analysts have pointed out that tends to be “fool’s gold.” There has been a shift in suburban white women back to the Republicans compared to the general election when they voted Democrat.

 

The Republicans are on track to build on gains they made in the 2020 elections. Despite losing the presidency, the Republicans had a net gain of 14 seats as voters engaged in ballot splitting.  More voters chose Republican representation in the house but chose Joe Biden or simply didn’t vote for Donald Trump for President.  Recent polls have the Republicans re-taking the majority with a gain of 18-31 seats. When you compare this to the 65-seat change during the 2010 midterms or the 41-seat change in 2018, this will be more on the weaker end of elections when the house flips.

 

The Senate is where things are getting tight. Currently, it is split 50-50 with the Vice President holding the key deciding vote on legislation for a 51-50 “majority.” The Democrats were able to win the Senate in 2020 by flipping two reliable Republican seats in Georgia. Through a combination of energized Democrats in the Atlanta area as well as poor candidate selection on the part of Republicans the Dems were able to continue the trend of turning Georgia “purple” which was gaining momentum over two election cycles. According to Nate Silver’s 538 Blog it is a dead heat with the Democrats holding on to a slim majority as you can here.  This is a meaningful change from September when there was a 60% likelihood of the Democrats holding on to the Senate.  This trend is echoed by RealClear Politics, where it is a foregone conclusion that the Republicans will retake the senate as you can see here.  

 

The battle for the Senate is coming down to three states: Nevada, Pennsylvania and Georgia. New York is the sleeper race and one to watch.  So don’t expect any immediate reaction if the races run late or get contentious. 

 

The outcome from the 2022 election could have long-term implications for the markets.  If Republicans pick up more than 25 seats it will be difficult for the Democrats to take back the house during the general election of 2024.  If Republicans take 1-2 seats in the Senate, a Democratic Senate would be a long-shot in 2024 as there is only one Senate Republican swing state (Florida) up for re-election in 2024.  Assuming that transpires, the markets will likely react more to what won’t change than what may change. A Republican-controlled House and Senate would ensure Medicare for All would have no chance of becoming law for the foreseeable future, as would any price caps on carbon.  There is also strong bipartisan support for supporting Ukraine through arms and sanctions, as well as the tariffs on China and restrictions on the export of sensitive technology. Here’s a brief summary of what could be impacted in the event that the current races swing in one direction or the other. 

 

Republican Portfolio:

• Energy.  Republicans want to loosen the rules that make it hard to build pipelines and energy infrastructure.  They also want to open up more federal land and waters to oil and gas drilling. All of this benefits the oil and gas sector.
• Health Care.  Medicare for all would be off the table, and presumably this would flow through to discussions of price caps on pharmaceuticals.  Managed Care companies and drug companies should benefit.
• Tax and Regulatory.  The risk of higher corporate taxes would be reduced, and less regulatory oversight.  Tech, small cap and financial firms are vulnerable to higher taxes and tougher regulation, so should benefit.
• “Woke Corporations.” The trend of Republicans targeting “woke corporations” like Disney and Facebook (Meta) is likely to continue in the event of a Republican sweep.

 

Democratic Portfolio

• Energy Transition.  Subsidies for solar, wind and electric vehicles are more generous owing to the Manchin-Schumer IRA law, which benefits renewable companies in general. 
• Drug Prices.  Democrats continue to push for drug price controls, which would adversely impact Pharmaceutical and Biotech companies.
• Big Tech Regulation.  Big tech faces pressure from both sides of the aisle, but Democrats have been more outspoken on this topic.  A Democrat win would be adverse for tech giants like Amazon and Alphabet (Google).
• Government Spending.  Democrats continue to promote domestic spending, particular from organizations like the National Institute of Health, which would benefit a whole range of medical technology companies.
• Labour.  A higher minimum wage and pro-union legislation would hurt big hirers like McDonald’s, Walmart and Uber.

Final Thoughts

If you invested $100 in the S&P 500 at the beginning of 2000, you would have about $404.67 now, assuming you reinvested all dividends. During this time we have seen both Republican and Democratic leaders with varying degrees of leadership styles and views on public policy. Throughout all the noise of the last two decades, the American economy has consistently been a rewarding space to invest.