PIMCO: US Midterm Election Outlook

30 september 2022

By Libby Cantrill, Managing Director, Public Policy at PIMCO

As of 39 days before the U.S. midterm elections, despite an improving political environment for President Biden, declining gas prices, and significantly higher Democratic enthusiasm than just a few months ago, the House of Representatives is still highly likely to switch to Republican control. This is likely for several reasons, including fewer competitive races for Republicans, a slight redistricting advantage for Republicans, more key Democratic retirements in swing districts, and a still-difficult economic environment for Democrats. 

The Senate, however, has been – and continues to be – more in toss-up territory with a slight advantage for Democrats to hold the Senate, but ultimately Senate control will likely come down to only a handful of states.  Importantly, regardless of which party wins the Senate, the winning party would still have a very small majority, and nothing close to a filibuster or veto-proof majority that one party would really need to really move the needle.

As such, the market implications of just a Republican House compared to a Republican House and a Republican Senate are mostly the same: Less fiscal support, more oversight of the Administration, and more policy volatility around more regular Congressional duties such as funding the government and increasing the debt ceiling.  The biggest difference if Republicans controlled the House and the Senate is that they would be able to throw more “sand-in-the-gears” for President Biden’s nominees in the Senate, but moderate Democrats have been doing that anyway. For example, the failed nomination for the Office of the Comptroller of the Currency (OCC), Vice Chair of Supervision at the Fed and Director of the Office of Management Budget (OMB), etc. 
 

The House: 

1. As a reminder, there are 435 seats in the House, all of which are up for election in November, and Democrats enter November with only a 5 seat majority, meaning a very small margin for error.  With every seat up, the House is considered to be a national election, more indicative of the national mood and general zeitgeist, and typically a referendum on the party in power.  To that end, the national mood, while having improved, is still bad with the vast minority of voters thinking the country is on the wrong track, and inflation and the economy persist as one of, if not the most important issue for both Republican and Democratic voters, while at the same time a majority of voters think Republicans are better equipped at handling the economy (here).  The Generic Ballot – which has historically had a relatively high predictive powers in midterms for the House – is effectively too close to call, but election forecasters have found that historically, Democrats require a significant advantage in the Generic Ballot to overcome some of that poll’s structural biases.
2. Most importantly – Democrats would have to “run-the-table” on the toss-up House seats according to the Cook Political Report; according to their analysis there are 31 toss-up races, and in order for Democrats to keep their majority, they would have to win 26 out of 31 of those.  To make it even harder, 22 of the 31 toss-up races are defended by Democrats, and only 9 are defended by Republicans, meaning Republicans are defending fewer vulnerable seats and only need to keep a fraction of the toss-ups in order to take back the House.
3. Bottom line:  The base case is that Republicans win the House, but by a fewer number of seats than what looked possible a few months ago.  Data seems to support Republicans picking up 10-20 seats (vs. 20-30 in earlier summer), leaving them with a small-ish majority, which could make more routine things more difficult, such as funding the government and increasing the debt ceiling.  A win is a win though, so from the markets perspective, a Republican majority in the House, regardless of the size, will mean that Biden’s legislative agenda is effectively on ice, although some compromise could be found on things such as crypto and energy security.

The Senate:

1. As we have said many times, the Senate is very different relative to the House, with only 1/3^rd of the 100 Senate seats up for election, and Democrats defending fewer seats (14) than Republicans (20).  Senate races tend to be much more candidate-driven, even more fundraising-driven, and depend on state idiosyncrasies.  Democrats have the narrowest of majorities and effectively need to hang onto every Senate seat in order to hold their majority.  Practically, the control of the Senate will come down to a few battleground races, but there are four, in particular, that will likely dictate the control of the Senate, including Georgia (currently Democrat), Nevada (Democrat), Pennsylvania (Republican), and Wisconsin (Republican).  

2. Bottom line:  With 39 days before the midterms, the Senate is a toss-up, although odds favor Democrats slightly to keep the Senate.  If Democrats win, the majority will remain razor thin – a good night would only render their majority 52-48, whereas for Republicans, it would be the same story, a good night would result in a similarly narrow majority.   To be sure: A Republican Senate would be challenging for President Biden, since Republicans would control the floor agenda and could make it a lot more difficult for Biden to nominate his candidates for the judiciary and administration, but as long as the House swings Republican, the Senate is less of a concern to markets.