Trying to make sense of midterms? Elections can be confusing, however we clearly run through the forces play and what potential outcomes the 2022 midterm results could bring us...
This week we head stateside to look at the 2022 mid-terms, an election that will, in all likelihood, determine the progress of the Biden campaign for the next two years. With voting well underway at the time of writing, we take a step back to look at the broader forces at play, which will likely determine US electoral politics going forward.
What's at stake?
⅓ or 34 seats in the Senate and all 435 seats in the house of representatives.
Background & Primer
Making sense of the US elections can be daunting for the outside observer. Just what determines the fortunes of contenders? The Clinton administration's campaign manager James Carville coined the term "its the economy stupid," and more recent polling suggests this holds true now more than ever. Most voters place concerns around inflation and the economy as the primary drivers for their vote, a concern not unnoticed by the Democratic contenders. The latter is already facing an uphill battle, given that the party in the White House has an abysmal track record of maintaining majorities in Congress. Cynics in us would go so far as to suggest that recent releases of crude from the SPR (Strategic Petroleum Reserve) were timed in line with the mid-terms (i.e. Gas prices being the most obvious signs of inflation for the average voter).
Voter perceptions of the economy's overall health can be determined by political orientation. Let's look at another rather telling statistic to crystallise this phenomenon. While 90% of registered Republican voters have had a negative/deeply negative view of the economy since the advent of the Biden administration, the percentage of Democrat voters is 60%. This implies that the average voter does not take an impartial view of economic prospects and that partisan alignment often plays a role. It also points to the increased polarisation of the electorate to levels not seen in years. So if it is the case that perceptions of the economy are oriented by partisan alignment, what might drive election results? For that, we may have to look elsewhere.
The traditional view has been that the drivers of party allegiance are split along racial and cultural lines. And if one were to read the headlines, one would be forgiven for still thinking this to be the case from the Black Lives Matter protests to the historic minority base for the Democratic party. But this is where the narrative may be wrong. Consider that the Trump numbers amongst Hispanic voters increased eight points from the beginning of his term to 2020 from 29% to 37%. Or most black voters in Michigan (where 3 out of 4 voters support BLM) say they are against defunding the police.
We are arguably in the middle of a transition period not seen since the days of Roosevelt's new deal (where a lot of the Southern Democrats ended up transferring allegiances to the Republican party). The face of the parties is in flux. The disparity is most apparent in the split for both parties amongst constituencies such as the rural and working-class vote, where Republicans have a 17-14 point lead. In contrast, the Democrats continue to make inroads in the big city. How far have we seemingly come from the Republicans being the party of big business?
Consider that Republicans continue to make considerable inroads to stay relevant to minority votes such as the Hispanic and Black vote. The Republican party most recently opened two community centres in New Mexico, seemingly to help prepare to-be citizens for their citizenship test.
The point we try to make, to put it simply, is this, the face of the partisan voter is changing. The traditional racial fault lines are no longer valid. The face of the democratic party is increasingly college-educated. Meanwhile, the Republican voter is the Small Business owning or working-class rural voter likely not to be college educated. This phenomenon likely has implications for policy going forward. The most obvious of which is the type of candidate getting nominated. The most significant evidence is that Donald J Trump now has a 90% success ratio in picking the winning candidates in the Republican primaries (granted, he tends to pick quite late in the race once there is more certainty).
Conversely, while candidates need to take extreme positions along ideological lines to ascertain nomination, this can also be detrimental to their chances in the general election. A pertinent example of this is New Hampshire's Republican nominee for the Senate, Don Bolduc, who in the primaries, supported claims of voter fraud in the 2020 elections. Only to promptly flip his stance once nomination had been ascertained (of course, this was due to further research on his part).
So we can safely state that cultural and ideological questions make the difference in keeping the base happy. But once the nomination has occurred (remember, partisan voters, are voting in primaries and will vote the same in the general), candidates then need to go after the rest to take the prize. This is the voting bloc that determines the election.
Taking the Prize
After the rather rigorous selection process that candidates are put through, we then move to the actual election day and herein, the story is different. This is where the silent voter takes primacy. The silent voter, or the independent, comes into three categories:
The swing voter is the ideologically neutral voter that looks at the issues at hand (e.g. the fiscally conservative and socially liberal voter). The splitter probably keeps most political strategists awake at night, voting one way for the legislature and the other for the white house. And finally, the fence sitter who waits till the last minute to decide based on the most current issue.
The key to the game is to target the voters in the first and third categories during the election campaign.
Regarding the swing voter, parties typically work towards prioritising specific issues over others. For example, the fiscally conservative and socially liberal voter would likely vote republican if inflation was top of mind, which would be the reason for the Democrats to prioritise Roe v Wade or climate change within the narrative. The strategy would be similar for the fence sitter, but this would be harder to maintain since their vote likely won't be determined until the final minute.
In the second category, the splitter would be the issues of men or women who would've reasoned based on individual candidates. Much like the fence sitter will be harder to determine until the final verdict. This voter will likely vote Republican since they would've presumably voted against Trump in the 2020 elections.
What Could Happen?
So let's move to the actuality of what's at stake. Here we think there are three scenarios (all from the perspective of what it implies for the administration):
The Lame Duck - The Lame Duck scenario implies that the republicans take both houses (they need an additional seat in the Senate and 218 in the reps). This would spell trouble for President Biden's policy wishes till the next election cycle. With the Senate responsible for confirming appointments, including to the Supreme Court and the House likely to start proceedings into Hunter Biden, the White House will be limited to trying to put out fires.
The Gridlock - This is a scenario where the Democrats retain control of the Senate while losing the house. This will mean that policy progress will be slow but still within the realm of possibility; legislation will have to be watered down and more quid-pro–quo. Life will be somewhat easier since appointments will be made more accessible. Should the Democrats remain in control of the Senate while there is only a thin Republican majority (as opposed to a large one), this will make it similar to the first scenario. It is somewhat similar to the second term of the Obama administration, except possibly much worse since the Trump camp can have outsized influence (and they tend to be much louder than the erstwhile Tea Party).
Winner Winner Chicken Dinner - In the unlikely (but still possible) scenario that Democrats retain control of both houses, the White House will probably be given a massive impetus to be much more aggressive in its agenda from climate to tax. It will be seen as an approval of the administration and its plan and substantially increase Biden's grip on the party.
From an investor's perspective?
The second and third are to us the more palatable scenarios. A lame-duck scenario would effectively ensure that no appropriated expenditures, including the CHIPS & Science Act, would get spent. At the same time, it would almost make government shutdowns inevitable. We contend that markets prefer certainty over uncertainty, and the status quo, especially halfway through a presidential term is possibly one less issue to contend with.
Markets & Commentary
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