Midterm blues for Democrats in the upcoming election?

As it stands, pollsters and the betting market suggest the House of Representatives will flip to the Republicans. The Senate is a tighter race, but the Republicans also appear to be gaining ground. Democrats have run on a narrow range of issues, which do not appear to have found significant resonance with floating voters.

As it stands, there is an 80% chance of a split congress, with just a 20% chance of the Democrats holding the House and the Senate [1]. Assuming that the pollsters are right, it is likely to put a halt to President Joe Biden’s legislative agenda – and may even end his hopes of a second run at the White House in 2024.

Perhaps the most important implication of this switch in the balance of power is that it would curb any new fiscal spending from the Biden administration. Major stimulus packages would not get through Congress, which in turn, could create some downward pressure on inflation. The Federal Reserve is likely to have this in mind when making its next interest rate decision.

Should the Democrats do better than expected, there is a risk of inflation running higher. It may embolden Biden to run in 2024, but also to enact further spending packages – though any future packages are likely to be smaller than those that have gone already. Higher interest rates could be an unwelcome side effect.

There are also implications for individual sectors. While foreign policy does not swing elections, the Republicans are likely to be more aggressive on defence and military spending, with aerospace and defence companies likely to be winners.

There are clear divisions on fossil fuels. While the Democrats pushed through significant measures on clean energy within the Inflation Reduction Act in August, they are unlikely to get any more spending approved for the energy transition. As such, clean energy is likely to lose out to fossil fuel groups.

Technology is likely to come under fire whether it is the Republicans or the Democrats in charge. The Republicans will want to have more regulation against technology because of censorship and political power, while the Democrats’ objections are around greed and data protection. As such, technology may lose out whoever is in power.

A Republican-dominated Congress would almost certainly signal the end of Biden’s plans for digital assets and stable coins. These have promise for the banking sector, with banks involved in both creating and distributing these coins.

The midterms may be a trial run for the US presidential election in 2024. In general, few incumbent parties do well in these elections, but this time round – with the ‘misery’ index high and presidential approval rating low – the Democrats have a hill to climb before the next election.

There are problems growing in the economy with some indicators turning negative. The housing market index, for example, has turned down, prompted by higher mortgage rates. The unemployment rate is likely to increase, even though the labour market is still relatively tight.

In the 90 years since the Second World War, the market has moved higher in the 12 months after a mid-term election. It is possible that this happens this time round, given undemanding valuations and the energy sector providing significant support. However, it still has a lot to digest, with a recession likely to be just round the corner.

The players for the 2024 presidential election are starting to circle – from Biden and Trump, to Ron DeSantis and Gavin Newson. High inflation, interest rates and a looming recession do not bode well for Biden. History shows that presidents have seldom been re-elected against such a weak economic backdrop.

If this article has raised any questions, please do speak to your usual Evelyn Partners adviser.

Source:

[1] 2022 Midterms, CNN, 3 November 2022