A (Way Too Early) Look Ahead at This Year’s Midterms

Midterms likely bring more gridlock, which markets shouldn’t mind. (Photo by adamkaz/iStock by Getty Images.)

Editors’ note: We assess politics and elections solely for their potential market impact. Stocks favor no party or politician. Partisanship and ideology can invite bias, impairing investment decisions.

Democrat Conor Lamb won last week’s special election for Pennsylvania’s 18^th congressional district, surprising many, given the district went President Trump’s way by 20 points in 2016. Some pundits are now extrapolating this outcome and predicting a Democratic “blue wave” sweeping November 6’s midterm elections. We think this is all premature—midterms are over seven months away, and general campaigning hasn’t begun yet. It will take a few more months before the race heats up and more focused opinion polling gives investors more to work with. Regardless, at this point, it seems to us the most likely outcome is a smaller shift than many cheer or fear. Whether the Democrats gain a few seats or the Republicans retain narrow control, we think gridlock likely persists, keeping legislative risks low for stocks.

Special elections and primaries aren’t especially revealing. Representative-elect Lamb won by largely running against his party’s leadership—disavowing Democratic minority leader Nancy Pelosi in a televised ad—and tailoring his platform and message to folks there. This seems more like a candidate appealing to voters on an individual basis than a sea change toward the Democratic Party. What happens in November will depend on how candidates from both parties campaign—what tactics and messages they use, and how those resonate with local voters.

In Texas, many observers hyped the near-doubling in Democratic primary turnout. And that is notable! But Republican turnout was still vastly higher. Early voting records were supposed to presage a Democratic surge in a state where Republican participation usually outweighs Democrats, but looking at one high-profile race—Representative Beto O’Rourke’s bid to unseat incumbent Senator Ted Cruz—1.5 million people voted in the Republican primary versus about 1 million in the Democratic primary. While turnout was double the last Democratic midterm primary, 50% more voters participated in the Republican primary. There were further intricacies down ballot, but when the dust settled, there just weren’t many sweeping conclusions to draw from this.

Instead of parsing early contests and special elections for grand meaning, we suggest looking at the structural makeup of November’s race, which suggests smaller moves are likelier than big shifts. Senate Democrats have 26 seats in play versus Republicans’ 8. Of those Democratic seats, 10 are in states Trump won. Republicans have just one seat up for grabs in a state Trump didn’t win—Nevada. This gives Republicans a structural edge, albeit a small one.

As for the House, national congressional polling would seem to give Democrats the edge, but this isn’t telling. These polls ignore constituencies by asking only about generic candidates and party preference, and they often don’t adjust for likely turnout or other factors. Some even poll all people versus narrowing to registered voters. In the House, incumbency is normally an advantage, so the party with fewer open seats typically has an edge. This year, Republicans have 37 open seats, while Democrats have just 17, according to The Atlantic’s 2018 Congressional Retirement Tracker. The Democratic Party would need to gain 24 seats for a majority, so they do appear to have an opening. But House races often echo Senate races in midterms—a small Senate shift suggests similar in the House.

None of this tells you which way the races will go. Rather, it lays out starting positions and shows how each party will need to allocate resources in order to win. Only time will tell whether they do so—and whether candidates run strong campaigns. None of this is knowable today.

Overall, though, whether Republicans or Democrats pick up a few seats, gridlock is the most probable outcome. If Republicans maintain their slim Senate majority and House control, party infighting probably keeps watering down major bills—the status quo stocks know and have been fine with since January 20, 2017. If the Senate and/or House tilt narrowly toward the Democrats, the current intraparty gridlock flips to old-fashioned gridlock. A small Democratic majority would struggle to override a Republican president’s veto. Either way, we believe Washington probably won’t be able to enact sweeping legislation, which is bullish for stocks. Keep this in mind as campaigning heats up and candidates make sweeping pledges—for stocks, what matters is Congress will likely keep doing far less than folks hope or fear.