Midterm Election Update – Bianco Research

The following charts support the idea that the midterms are going to be a lot closer than conventional wisdom suggests.

Earlier this year, Nate Silver’s FiveThirtyEight blog looked at the generic Congressional ballot, in which voters are asked if they were more likely to vote for the Democrat or Republican candidate, without attaching a specific name to the question. Silver’s analysis concluded the Democrats need a 6% to 7% lead in this poll to win the majority in the House, a net pickup of 24 seats. To this end, FiveThirtyEight tracks these polls by weighting them and adjusting them for accuracy. The results of these adjustments are shown below.

The top panel of the chart below shows FiveThirtyEight’s adjusted generic ballot results. The green line in the bottom panel shows the difference (Democrat less Republican). Currently, this spread is at a 6.7% Democrat advantage.

If FiveThirtyEight’s analysis is correct, it is going to be a late election night for those waiting on returns for a definitive answer on who controls the House.

This has not gone unnoticed by the bettors at Predictit.org. While the Democrats (blue) are still trading above 50% odds to control the House, their lead over the Republicans (red) is narrowing and at its lowest level since early March.

We view betting markets as an aggregation of consensus opinion into one statistic. While bettors might not get it right (see Brexit and Trump in 2016), they tell us what is expected. For now, bettors think the Democrats will win the House, although their odds of doing so are dwindling.

The Senate is a different game. Of the 35 seats to be contested this fall, 26 are held by the Democrats while only nine are held by the Republican. This makes it difficult for the Democrats to become the majority as they have to hold 26 Senate seats and have just nine opportunities to pick up a Republican seat.

This is reflected in the betting at Predictit.org. The red line in the chart below shows the odds Republicans hold the Senate according to bettors are at 74% and have been rising over the past month.

Finally, the chart below shows the 5-day average of Trump’s approval rating taken from all available reputable polls. It has been rallying since mid-December before pulling back slightly in the past week or two. Mid-December is when the tax bill passed.

Conclusion

Finding a relationship between politics and financial markets has been difficult since Trump’s inauguration. Instead, financial markets are justifiably more concerned with interest rates, earnings, inflation, monetary policy and real growth. If politics have played into markets, it has been the large rollback in regulations that have been seen as a positive.

There are several reasons markets may have put the November midterms on the back burner. One is that the election is still roughly 5 months away. Another is that they have largely been expected to fall to the Democrats. If the trends shown above continue to a meaningful degree, perhaps the markets will begin to take notice.