US midterm election : potential economic agenda and market implications
In the upcoming US Midterm elections on November 6, there are high expectations of divided Congress, with the Democratic Party taking control of the House of Representatives and the Grand Old Party (GOP) retaining control of the Senate. Other scenarios are possible: the Republicans could maintain control of Congress, or the Democrats could sweep both the House and the Senate. In this piece, we examine some of the reasons the most likely election outcome is a divided Congress. We then look at the economic agendas for both parties, and potential issues around their implementation. Finally, we analyse possible investment implications on US equities and fixed income markets.
Uphill Battle for GOP
Political fundamentals point to a favourable backdrop for the Democrats to regain control of the House. Currently, Republicans control both chambers of Congress – the House majority is 237-193, with 5 vacancies; the Senate majority is a narrow 51-49. The Democrats need to gain 23 seats in the House and 2 seats in the Senate to take control.
The House has more potential to flip to the Democrats than the Senate because there are many more marginal Republican seats compared to marginal Democratic seats. There are 23 districts that voted for the GOP House candidate and Secretary Hillary Clinton in 2016, compared with 7 districts that voted for the Democratic House candidate and Trump. On the other hand, the Democrats are clearly on the defensive in the Senate with the need to defend 26 seats out of 35 seats that are up for reelection. In addition, Red State Democrats will be trying to win reelection in states where Trump’s margin of victory was at, or exceeded, 20% (Missouri, Indiana, Montana, North Dakota and West Virginia).
Why Democrats are favoured to win the House
The Democrats are holding a solid lead in the generic ballot. The generic ballot is based on polls that ask voters which party they would support in a congressional election, Democratic or Republican. Some political strategists believe that due to gerrymandering (politically designed districts by the party in charge); the Democrats need around a 7% lead in the generic ballot to gain a majority in the House. The current generic ballot has an 8.5% Democratic lead over the GOP (Chart 1).
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