Market Risk and Midterm Elections: Eyes on the Senate
Midterm elections are next week on November 8 and turnout is expected to be high. It is also the day of the November full moon, which is called the Blood Moon. There will be a total lunar eclipse. What could go wrong?
I expect Republicans to take the House
For some time I have believed the Republicans will take control of the House, and this continues to be my high-conviction call. Based on current polling, I estimate the Republicans’ net gain could be in the range of 20 to 30 seats.
If Democrats keep the House, it would break historical precedent as well as current polling and therefore likely shake up the markets.
While some individual seats may be uncertain, by dawn on Wednesday, November 9, we should know who took control of the House.
It’s a different story for the Senate elections.
Senate control too close to call
Earlier this year, I believed there was roughly a two-thirds chance that Democrats would hold the Senate. However, movements in polling and prediction markets have changed those odds. I now put the control of the Senate at a coin-flip.
With less than a week left, the odds could shift again. But with so many people voting before Election Day, I don't know how much a last-minute development would impact market sentiment or volatility.
Delayed outcomes could foster market risk
It looks like a number of key Senate races may be very close. In that case, it could be days before we know the result because they will have to wait for all the mail-in ballots to arrive and be counted. And if the races are very close, there could be recounts of the votes. That would delay the resolution of the electoral races, and knowing who will control the Senate.
It could be a week or more to determine some of the races. There may be claims of rigged or stolen elections, which in my opinion would do nothing good for social cohesion or market risk. There could be court fights.
Georgia on my mind
It is possible that, once again, control of the Senate will depend on Georgia. If Democrats lose Nevada, gain Pennsylvania and hold Arizona, it could come down to Georgia.
The Libertarian Party candidate in Georgia is doing surprisingly well. If no candidate gets over 50% of the popular vote, there will be a runoff election on December 6; this may be a more likely outcome in my view. In this scenario, the party that wins Georgia’s runoff wins the Senate.
This scenario could have high political risk for a month after Election Day.
Does it matter who wins the Senate?
If the Republicans take the House, as I think is likely, then what difference would it make who controls the Senate? Either way, there is divided government.
The Senate matters because all presidential nominations for the cabinet, regulatory agencies (including the Federal Reserve), and federal courts (including the Supreme Court) are subject to Senate approval. It takes just a majority vote; there is no filibuster on nominations.
As the Senate has been controlled by Democrats, President Biden's nominations were confirmed by the Senate, often on a party-line vote. Only a few times, a nominee displeased a Democratic senator and the nomination had to be withdrawn.
If Republicans take the Senate, all of President Biden's nominations would have to be accepted by the opposition party. Cabinet positions typically are not a problem, but there would likely be tough reviews of nominations for regulatory agencies or courts. This reality would likely force President Biden to govern closer to the middle of the political spectrum.
So, in my opinion, control of the Senate does matter a great deal.
And markets will likely react to news on Senate control.
Markets tend to like divided government: the two parties cancel out each other's ambitions. The only times the federal government has run budget surpluses in the past 75 years has been under divided government.
So, if we end up with divided government after the midterms, I think markets could react positively.
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