Election Day: All Eyes on Virginia

CNN – Why Democrats are in a lot of trouble in Virginia
Virginia will have the eyes of the political world on it Tuesday night. Most of the attention will be on the marquee gubernatorial election between Democrat Terry McAuliffe and Republican Glenn Youngkin. Less watched, but important for its national implications, are the elections for the 100 seats in the House of Delegates. If the polls are to be believed, Republicans are going to do very well in Virginia given the political baseline in the state. Traditionally, this would foretell a strong Republican performance in next year’s midterms. In fact, given Virginia is more blue than the nation as a whole on the presidential level, a tie in this year’s gubernatorial election would essentially be in line with Republicans winning the national House vote by 5 points next year.

Summary

Wall Street is focused on two things, assessing how much fiscal stimulus the economy will get in 2022 and whether the December 3 debt ceiling will be messy. The Virginia gubernatorial election today could be a key factor in assessing these outlooks.

Comment

Today is election day and the most consequential election for the economy/markets is probably Virginia’s governor race. It is being viewed as a referendum on the Democratic agenda.

This race pits Terry McAuliffe, the former Democrat governor, against Republican newcomer Glenn Youngkin. Youngkin left the role of Co-CEO of the Carlyle Group just last year.

As the chart below shows, McAuliffe (blue) had a sizable lead until about a month ago. Following some comments in a September 30 debate, his polling numbers started to move lower. As of a few days ago, Youngkin (red) took the lead in the polls.

The betting markets are showing something similar. On extremely heavy volume (bottom panel), Youngkin has now taken the lead.

We should point out that recent history is full of polling and betting market errors. The charts above should simply be considered a gauge of consensus opinion going into election day. Tonight we should know if these sentiments are accurate.

If they are, and McAuliffe loses, many political wags are suggesting this would be a notable event. The Democrat agenda, which McAuliffe fully supports, would take a hit. The fate of the budget/spending/infrastructure/debt ceiling bills could depend on this election.

As the story below notes, perhaps Manchin is reading the tea leaves and hedging his bets on the Democrat’s agenda.

Bloomberg – Manchin Slams Brakes on Biden Plan, Chides Progressives
West Virginia Democrat says he wants full economic analysis
Statement is a blow to efforts to move quickly on package
Senator Joe Manchin said Congress needs more time to assess the impact of President Joe Biden’s $1.75 trillion tax and spending package on the economy and the national debt, slamming the door on hopes by Democratic leaders for quick action on the plan. The West Virginia Democrat on Monday refused to say whether he supports the outline Biden presented last week or whether there had been any progress in negotiations over the weekend. His remarks are a blow to Biden, who presented to House Democrats what he said was a compromise plan worked out over weeks of negotiations that would win support from all 50 senators who caucus with Democrats.

Unified governments typically do not have difficulty in pushing forward their agenda. Part of the problem is undoubtedly Biden’s approval rating, which continues to move lower.

How does this impact the markets? Many on Wall Street were expecting large spending bills to provide fiscal stimulus into 2022. This might have to be reassessed.

Even if these bills are in trouble, one thing cannot be avoided. The debt ceiling, which is projected to be hit on December 3, must be raised.

Yahoo – Yellen says Democrats, if needed, must tackle debt limit alone -Washington Post

“Should it be done on a bipartisan basis? Absolutely. Now, if they’re not going to cooperate, I don’t want to play chicken and end up not raising the debt ceiling. I think that’s the worst possible outcome,” Yellen told The Washington Post on Sunday as she traveled to Dublin. “If Democrats have to do it by themselves, that’s better than defaulting on the debt to teach the Republicans a lesson,” she added.

Raising the debt ceiling is often unpopular, which is why Congress would like to have this bill be bi-partisan.

Democrats are left with two politically unpalatable choices. They could unilaterally raise the debt ceiling or negotiate with Republicans by offering some sort of compromise.

While the debt ceiling is still five weeks away from being hit, the T-bill yield curve is already pricing in concerns. The curve shown below should normally be dead flat through the end of the year.

Conclusion

Washington politics are always messy. Should McCuliffe lose tonight, they could become even messier. More fiscal headwinds and debt ceiling drama could be the result.