Cantor Canned, Stocks Jarred?

Will the House’s big upset put stocks in a pickle?

A politician loses his job. Photo by Mark Wilson/Getty Images.

US politics went topsy-turvy Tuesday, when Eric Cantor became the first-ever House Majority Leader to lose a re-election primary, falling to Tea Party challenger David Brat by a wide margin. Media near universally agrees the result was a shocker. Stocks have pulled back since, and some think the defeat of the House’s number-two Republican is why. Sure, he’s just one of 435 House reps, but politicos credit him for economic policy compromises like the debt ceiling, budget resolutions and the continued survival of the Export-Import Bank—and for being a friend of business and Wall Street. Others say his defeat at the hands of a Tea Party challenger signals an ideological shift in the Republican Party this November—less compromise, more gridlock. In our view, though, that’s all a bit hasty. Politicians bickered and begrudgingly compromised for decades before Cantor was born, never mind his 2001 election to the House, and one primary election with an ultra-low turnout says nothing about November’s contest. For stocks, this is all just noise.

Whether you cheer or fear the prospect of a greater Tea Party presence in the House next year, Tuesday’s upset isn’t a blueprint for November. It’s simply what happens when one politician catches another taking his position for granted at a time when voters are a bit restive and turnout is low. Only 65,022 of the 474,714 registered voters in Cantor’s district (it was an open primary) cast a ballot—hardly representative of the entire country.i It’s also extremely anecdotal: Just as Tim Donnelly’s loss to Neel Kashkari in California’s Gubernatorial Republican primary last week didn’t signal the Tea Party’s death nationally, Brat’s shock win doesn’t signal its dominance. It’s just one thing.

This isn’t the first time the media has jumped into overdrive claiming one primary or special election indicates what will happen in November. Pundits called Florida Republican David Jolly’s March House by-election victory a bellwether. Ditto for last month’s primaries in Kentucky, Georgia and Idaho, which were less kind to the Tea Party. One Mississippi suburb was dubbed a bellwether for the state’s Senate contest. None of this means anything! It just gives talking heads something to jabber about—employment insurance for cable TV personalities.

The factors that really influence and preview November’s outcome are much broader and much simpler. It starts with the structural breakdown: Which party has the numerical advantage in each chamber? In the House, since incumbents are usually tough to beat (with Tuesday’s obvious exception), it comes down to open seats: The Republicans have more—29 to the Democrats’ 18, including Primary losses, as of June 10—but they also entered the race with a 34-seat majority. The Democrats might gain seats, but taking the chamber is a tall order. In the Senate, the key is vulnerable seats—those one party has to defend in their opponent’s traditional territory. Here, the Republicans have the advantage—they have one seat to defend in Blue states, while the Democrats have to play defense in six Red states. But that doesn’t mean the Republicans take the Senate—doing so would require flawless campaigning, a la 1994’s “Republican Revolution” or 2010’s midterm landslide.

It’s too early to handicap how the campaigns go. They’re only starting to draw the battle lines and many states have yet to hold primaries. But there are likely two main, national influences. One, of course is money, and Senate races aren’t the only contests vying for funds. There are 36 gubernatorial elections in November, and there, Republicans are on defense—they have nine state houses in states that voted Democratic in the past four Presidential elections, and three of these are in states where Democrats are defending senate seats (Iowa, Michigan and New Mexico). These are essentially must-win for the Republicans to secure a majority, but if GOP leadership chooses to divert campaign cash to the corresponding gubernatorial races, the Senate gets that much harder to take.

Another factor is President Obama. The President is usually the standard-bearer for his party—his approval ratings are a snapshot of how folks feel about his cohorts on the campaign trail. In 2006, for example, George W. Bush’s approval rating hit the skids, and the Democrats steamrolled in November. Interestingly, for much of Obama’s second term, his approval ratings mirrored Bush’s. They diverged some in the spring, as the botched Affordable Care Act faded from memory, but the VA scandal knocked them down again more recently, and it wouldn’t shock to see the latest quagmire in Iraq take a toll on his popularity. Either way, how the numbers evolve over the next four-plus months could be a fairly reliable barometer.

Another indicator? Polling trends in urban and rural areas. America’s body politic has become increasingly polarized over the past several years, with Democratic voters concentrated in cities (and, increasingly, dense suburbs) and Republicans in areas with lower population density. If polls indicate a change in either—on more than an anecdotal basis—that’s probably telling. As are polls in states with Senate and Gubernatorial races—the real hot seats.

For now, it’s too early to predict the exact breakdown on Capitol Hill when the winners take their seats in January. But whatever the specific numbers, it’s exceedingly unlikely either party gains a filibuster-proof majority in both chambers. Even if Congress doesn’t stay split, the most likely outcome is more gridlock—bullish for stocks, whatever the talking heads might tell you.

i “Low turnout,” of course, is in the eye of the beholder. Tuesday’s turnout was about 36.2% higher than the turnout in the 2012 primary.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.