Wednesday, November 30, 2022

Here’s who Wall Street thinks will win the midterm elections

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Wall Street analysts are betting that Tuesday’s midterm elections will flip control of Congress, with potentially significant implications for the U.S. economy.

History backs them up: The president’s party has lost between 25 and 30 House seats in nearly every modern midterm election. But this year, the economy is playing an outsized role. A recent Gallup poll found that the portion of registered voters calling the economy “extremely important” in who they support at the ballot box is at its second-highest level in two decades.

Muddying the picture this year is that the economy is sending mixed signals. A historically strong job market and high rates of Americans starting businesses coexist with the highest inflation since the early 1980s and soaring energy costs. 

In poll after poll, Americans have cited the rapidly rising price of food, gasoline and housing as a major concern going into the election. Fuel costs, in particular, have long been correlated with the approval rating of the person in the White House. While prices at the pump have fallen from record-highs levels in June, they’re still nearly 40 cents a gallon higher than a year ago for regular gas. 

One economic metric predicts larger-than-average losses for the Democratic Party, Goldman Sachs analysts recently wrote. Real disposable personal income — or the amount of money people have left over after taxes — has fallen precipitously this year. 

“We find that headline CPI and gas prices are roughly equal in their statistical significance for midterm election results, but neither is as strong a predictor of election results as real disposable income growth, which has declined more over the last year than in any midterm election year since the data began,” the investment bank said in a report.

Real wages have also declined since last year, as prices rise faster than workers’ pay.

Impact on stocks?

Regardless of which way the vote swings, history shows one outcome is nearly certain: Stock markets will likely go up. 

“Markets historically have done well in the year after midterms,” strategists at LPL Financial wrote Monday. “In fact, they have been higher 18 out of 18 times in the following year dating back to 1950, with nearly identical historical returns under Democratic and Republican presidents.

Financial markets also tend to like divided government because the chances of passing sweeping legislation dramatically diminishes when opposing parties share power. And if pollsters’ predictions bear out and Republicans gain control of one or both chambers of Congress, it could chill, if not freeze, the Democrats’ legislative agenda. 

Some analysts see a path for limited legislation on areas both parties agree on, such as reining in tech companies, strengthening antitrust enforcement and regulating cryptocurrencies. With a divided Congress, however, Wall Street analysts think Republicans would focus on oversight hearings and measures on social issues, such as abortion, public education and trans women in sports, rather than legislation that could reasonably shift the economy.

What does October’s strong jobs report say about the U.S. economy?


“Republicans in the House are likely to focus on ‘messaging bills’ that highlight the differences between Republicans and Democrats, with little intent or expectation that they would overcome a Democratic filibuster in the Senate or being signed into law by President Biden,” Benjamin Salisbury, an analyst with Height Securities, said in a research note this week.

Since Congress will need to pass legislation to raise the debt ceiling early next year, a showdown could ensue over the federal government’s borrowing limit, Salisbury noted. That could give a Republican-controlled House leverage to demand concessions on the party’s priorities, including increasing military spending, funding the border wall, eliminating federal regulations and making permanent the Trump-era Tax Cuts and Jobs Act.

Still, Despite Republican opposition to recent Democratic wins, including massive domestic infrastructure spending and beefing up the IRS’ ability to go after tax cheats, “the potential for a 180-degree turn in 2023 is extremely low because of the Senate filibuster and the Presidential veto,” he said. 

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Legislative gridlock in Washington would force the Biden administration to pursue its priorities through personnel appointed in the first two years. Those include Democratic majorities on the Federal Trade Commission and the National Labor Relations Board, as well as Mr. Biden’s appointment of Rohit Chopra to lead the Consumer Financial Protection Bureau. 

Taken together, those regulators are likely to continue the administration’s pro-consumer agenda, taking a tough line on corporate mergers, banks and regulation of financial products like buy-now-pay-later loans and cryptocurrencies, according to Cowen analyst Jaret Seiberg. 

“There is nothing Republican majorities on Capitol Hill can do to block expected increases in bank capital requirements, tougher rules on consumer finance, changes in housing policy, oversight of crypto or SEC rules on climate change reporting, SPACs or market structure,” he said in a research note.

Seiberg expects the CFPB to push for lower credit card fees and bank overdraft fees, and to reimburse consumers defrauded in Zelle payment scams.

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