Our Snap, Preliminary, Too Early Take on America’s Midterm Elections

Patience is an underrated virtue, in our view.

Editors’ Note: MarketMinder Europe favors no party nor any politician, assessing developments solely for their potential market and economic implications.

Six days after America’s midterm election votes were due, a bit still remains unclear. The state of Georgia is headed for a Senate runoff election on 6 December, as neither candidate received the required majority of votes.^[i] Quite a few races are undecided in the House of Representatives (or, “the House”), too.^[ii] Over the weekend, the Democratic Party sealed control of the Senate after confirming victories in both Arizona and Nevada—giving them 50 votes in the 100-seat chamber.^[iii] Even if they don’t win the runoff in Georgia, Vice President Kamala Harris—a Democrat—breaks the tie if there is a 50 – 50 vote, extending the Democrats’ control. Meanwhile, although the House seems to be heading for Republican Party control—which would usher in the bullish gridlock that our research finds typically benefits markets after midterms—that isn’t assured yet. In our view, all this is keeping uncertainty high right now, but we think it is likely to start falling fast before long.

In our view, there are only a couple definitive statements one can make about the midterm election for now. One, it went off without much protesting or squabbling over improprieties. Two, it was a very close election. Despite what some political commentators we follow predicted, there wasn’t overwhelming Republican success in the House. However, the lack of a Republican landslide is basically what we thought likely heading into the contest. As Fisher Investments founder and Executive Chairman Ken Fisher explained in his August LinkedIn column, the House’s structure made a wave election highly unlikely:

Why? Because the Republican’s 14 House seat gain in 2020—a year when they only won 47.7% of the national congressional vote—was exceptional. Getting it meant they won some of the “easy” seats that the party opposing the president normally couldn’t win until the midterms. Consider: If the Republicans win those 38 seats previously referenced [the average change when the president’s popularity is below average], they would hold 251 seats—9 and 21 seats more than they had after their huge wave election landslides of 1994 and 2010, when they picked up 54 and 63 seats, respectively. It would be their most since 1928.^[iv]

That said, we think it is probably fair to say this House race has proven a little closer and more unclear than even we thought likely. Now, most projections suggest the Republicans will take control—in line with our expectations. The Associated Press gives them 212 seats presently, with 6 more needed for a majority. The Democrats, as we type, have 203.^[v] That leaves 20 undecided. Analysis from National Public Radio—not known as a Republican bastion—puts the House GOP majority at 221 or 222 seats.^[vi] But a 221 – 214 majority, if that is what winds up happening, is historically thin. This implies the Democratic Party did quite well relative to history, although, again, this isn’t yet assured. There are votes left to count and we aren’t making any presumptions about how they will look. That said, we will likely know the winners in the coming days, which should add quite a bit of clarity.

The Senate’s tightness didn’t surprise us whatsoever. In our view, the structure of this vote meant only a handful of races really mattered, and our research suggested they slightly favoured the Democrats. Victories in Pennsylvania, Arizona and Nevada confirmed their control.

Now, all markets really need to get the gridlock we think they seek is the House of Representatives’ flipping to the Republicans. If—and again, this is an if—the House changes hands, the margins don’t matter. The majority, even a one-seat majority, determines what legislation does and doesn’t come up for a vote. That would divide government and would likely forestall extreme legislation and major change that complicates businesses’ planning and creates winners and losers. Yet, in our view, it may take stocks longer to realise this if a long Republican leadership tussle extends uncertainty in the near term.

Conversely, if the Democrats retain both the House and Senate, legislative risk could rise. And it could also be that current House Speaker Nancy Pelosi tries persuading a couple Republicans to flip parties and maintain the Democratic lead. But as of now, neither of these outcomes are assured and regardless, politics are only one market driver. We think investors benefit from assessing things from a holistic, global point of view. But we are getting ahead of ourselves. For now, we suggest staying cool and waiting for the election’s lingering results to roll in, granting the clarity markets seek.