For this week’s missive, we thought we would step away from our usual fare and instead weigh in on the upcoming U.S. midterm elections, which will be held on Tuesday, November 8th. Let’s first start with a brief primer:
- Every two-years, the U.S. holds elections for Congress. Every other cycle this coincides with a Presidential election, whereas the elections that take place in the middle of a president’s term are referred to as “midterms”.
- The House of Representatives: Representative terms are for two-years, thus every two-years all 435 House seats are up for election. The number of House seats per state are based on population with California controlling the most seats -53 and several smaller states controlling just one seat. The Democrats currently control 220 seats, while Republicans hold 212 and 3 are vacant;
- The Senate: There are 100 seats in the Senate with each state controlling two seats. Senators serve six-year terms with ~1/3rd of all seats up for election every two-years. Democrats currently hold 48 seats, while 2 seats are held by Independents, who caucus with the Democrats, and Republicans hold 50 seats. Since it is 50/50, the Vice-President of the U.S. casts the decisive vote and thus the Democrats hold the majority. There are 35 seats up for election in 2022 with 14 held by Democrats and 21 held by Republicans.
Okay, with that out of the way, let’s discuss what is likely to happen on Election Day:
The House of Representatives
Before we get to the specifics of this election, it is very important to note that midterm elections very rarely favor the party that controls the White House:
As you can see, since World War II, the U.S. has held 20 midterm elections and in 18 of those, the party that controlled the White House (the incumbent party) lost seats with an average seat loss over the 20 elections of 27 seats. If we were to use this as a guide, it would suggest that even if the upcoming election followed the path of the average midterm election since WWII, control would look something like 241-194 in favor of the Republican party.
Now, it doesn’t really matter why the incumbent party almost always loses seats, but rather, we would note that even when the President is generally widely popular – Eisenhower and Reagan prime examples – the incumbent party has still found it a difficult climb to prevent steep losses at the House level.
If we add to that a President’s popularity, we can see an even more decisive shift:
We would note that President Biden’s approval ratings have consistently been below 50%, so while he was already swimming upstream given the proclivity for incumbent midterm losses, his approval rating adds another layer of challenge for Democrats.
Further, the U.S. sadly has leaned very heavily into redistricting and so called gerrymandering over the past several decades, which has led to district maps that look like this:
The so called “snake by the lake” is Ohio’s 9th District, which because of climate change and rising water levels on Lake Erie, may not be one contiguous District for much longer. This gerrymandering is done to pack as many Democrats or Republicans as possible into one District so that the party that controls the state legislature can limit the power of the opposing party. How is this allowed one might add? Simply, because Americans are stupid (note that I am one of them, so can say this with no fear of repercussions).
Anyway, because of redistricting, there are very few seats of the 435 that are considered “up for grabs” with pundits currently forecasting (https://www.270towin.com/2022-house-election/) that only 14 seats are a toss-up with another 11 seats that only lean slightly to one party or the other. Of the remaining 410 seats, gerrymandering as well as polling suggests that the Republicans are likely to win between 210 and 220 seats, while Democrats are likely to win between 190 and 200 seats. Considering 218 seats are needed for control, the math is currently very favorable to Republicans gaining control of the House in November.
The Senate math is a bit more favorable for Democrats. First off, the Senate does not show the same anti-incumbency bias as the House when it comes to midterm elections. Second, as mentioned above, there are 35 seats up for election and 21 of these are defended by Republicans. So, in a sense, Republicans have more at risk in the upcoming election as they not only need to successfully defend more seats, but they also need to win at least one seat currently held by Democrats to take the majority in the Senate.
Of the 35 seats up for election, 26 are not considered likely to change party (16 Republican and 10 Democrat), while 8 have at least some potential to flip. Of these eight, four are held by each party. The eight seats are Nevada (currently Dem), Georgia (D), Arizona (D), New Hampshire (D), Pennsylvania (R – retiring), Ohio (R), Wisconsin (R), and North Carolina (R).
While we think this is likely to come down to a bunch of very close votes, considering the Democrats need to only hold serve, we would give them a slight advantage. Further, while polls are tight, the Democratic candidate currently leads in Arizona, New Hampshire and Pennsylvania, which would suggest that the Democrats need only one of the remaining five races to go their way to maintain control.
That said – with an unpopular President and resoundingly negative views toward the economy, there is a risk for Democrats that they not only lose seats in the Senate, but also that there are some negative surprises in races that are not considered close – Colorado, Washington for example. The risk of this sort of thing for Republicans is likely much lower.
Should the Democrats lose control of one or both Houses of Congress, the last two years of the Biden Administration are likely to get severely bogged down. Passing legislation has been hard enough for Democrats with a 50/50 split in the Senate and control of the House, but without one or both of these, it is likely to prove close to impossible.
From an investor perspective, this is not actually a bad thing. Markets have tended to favor so called gridlock – when the White House and at least one House of Congress are in different party hands. We would argue that gridlock might be even more preferable over the next two-years as we are obviously dealing with a challenging inflationary outlook and more fiscal stimulus (more likely with one party control) is probably not a good thing at the present time.
Thus, while there is likely to be much swooning over the outcome of the coming election, we would note that the market is unlikely to react in the same way that the punditry reacts.