By Greg Valliere
Horizon's Chief Global Strategist
November 5, 2018
Our Final Election Call – and the Implications
MOMENTUM MATTERS: Just as momentum shifted in the final week of the 2016 presidential campaign, there's been a slightly smaller but unmistakable uptick in the past few days toward Republicans, who have been buoyed by fear over illegal immigration and further evidence of a booming economy.
THUS OUR FINAL ELECTION FORECAST reiterates our contrarian theme that there will be no tidal wave. The easiest call is that the Republicans will keep the Senate, probably adding two net seats. The House suddenly has become a closer call, but we'll predict a net gain of 29 seats for Democrats – nothing to brag about by historical standards – but six more than they need to regain control. Democrats are also poised to win a handful of governorships and dozens of legislative seats.
A GOOD BUT NOT GREAT SHOWING for the Democrats wasn't what party leaders were expecting in August, but their arguments in the past week have lacked the Trumpian sizzle. A prime example was the evisceration of Democratic National Committee Chairman Tom Perez in a CNN interview with Jake Tapper yesterday (so much for charges that CNN is a lapdog for the Democrats). Under relentless questioning, Perez was unable to explain why the economy is roaring; he stumbled and mumbled, returning time and time again to health care.
PERHAPS THE ISSUE OF PRE-EXISTING CONDITIONS will make the difference in close House races, but Senate contests in Trump country will revolve around the "invasion" of a pitiful caravan that's hundreds of miles from the U.S. border. The Trump base is now motivated over illegal immigration, and turnout in red states will make a huge difference for GOP Senate candidates in Texas, Missouri, Indiana, North Dakota, etc. Trump gets it – immigration moves the needle.
ONE CAVEAT: At dawn on Wednesday morning, it's entirely possible that the final outcome in the House will be unclear; Senate control probably will be settled. We expect lots of recounts, a focus on absentee ballots and charges of voter fraud – to be expected after a campaign this divisive.
SO – WHAT ARE THE IMPLICATIONS FOR THE MARKETS? Not enormous, frankly. We have four take-aways:
First, continued gridlock, with only a few issues like infrastructure likely to move in 2019. Gridlock is benign for the markets, although the inability to agree on any fiscal discipline could eventually become an irritant.
Second, a continued tidal wave of young conservative judges winning confirmation to federal courts, thanks to Mitch McConnell and a GOP Senate.
Third, no serious threat to Trump's economic agenda; his veto power will be dominant for the next two years.
Fourth, a flood of subpoenas against Trump and his aides if the Democrats take the House, with the possibility of impeachment – which still seems unlikely to produce a conviction in the Senate.
THE MARKETS CAN LIVE WITH THOSE OUTCOMES: Tomorrow's results may have only a modest impact on investors, who have two bigger macro worries: the likelihood of more Fed rate hikes in the wake of Friday's tremendous jobs report; and the realization that Trump's tease last week on trade progress with China was largely pre-election spin. There's no imminent deal with Beijing.
BY THE END OF THIS WEEK, the focus will have shifted to other issues: the 2020 presidential election; the next move from Robert Mueller, who has been very busy behind the scenes; the next Fed rate hike and Trump's response; the Trump-Xi meeting; a tidal wave of departures from the White House, etc. But the dominant story for investors will remain unchanged: solid economic fundamentals, with no sign of an imminent slowdown. There's plenty of stimulus still in the pipeline.