Page 17 - ISQ October 2022

INVESTMENT STRATEGY QUARTERLY

Our base case remains that the House is likely to flip toward The optimistic case for Democrats retaining or even expanding
Republicans, but the margin of victory may be smaller than antic- their Senate majority rests on the following: backlash to the
ipated, which may impact any legislation that the House may Supreme Court’s Dobbs decision, a roster of untested/unconven-
ultimately be able to pass with a smaller Republican majority in tional challengers in key races, and the historical consistency of
2023-2024. states’ preferences between presidential and Senate elections
serving as tailwinds for Democrats in the race for the Senate. We
have also observed a trend of Senate candidates significantly
THE BATTLE FOR THE SENATE
over-performing the national approval rating of incumbent presi-
Political support for the Biden administration’s regulatory agenda dents of the same party, which limits the potential drag of an
and the ability of the White House to confirm selections to top unpopular presidency on the prospects of Democrats retaining
government posts (including the Supreme Court) will rest with control of the Senate.
control of the Senate. As such, we are likely to see significant
financial resources and political capital devoted to the key Senate Diving deeper into these factors, we see the potential impact of
races, which we currently view to be Arizona, Georgia, New Hamp- the Dobbs decision rippling through the key Senate races of AZ,
shire, Nevada (current Democratic-controlled seats); and North GA, NC, PA, and WI in terms of voter turnout, enthusiasm, and
Carolina, Pennsylvania, and Wisconsin (current Republican-con- support from Democratic-leaning independent voters. While
these states do not have high-profile ballot initiatives similar to
trolled seats). Swing seats include Florida (Republican incumbent) Kansas, the down-ballot state-level policy impact may influence
and Colorado (Democratic incumbent). voter behaviour. The Republican nominees in some of these key

Looking at the seats Democrats are defending, Democratic incum- races (particularly AZ, GA, and PA) are first-time candidates, which
bents currently have both the funding and polling advantage has proven to be risky in past high-profile elections with the pos-
across AZ, GA, NV, and NH. However, the 2020 Senate race showed sibility of gaffes and missteps in the final stretch. We have also
that these metrics should be viewed with some caution in terms of observed a trend of states maintaining consistent party prefer-
their predictive power. Particularly, 2020 polls significantly under- ence across presidential and midterm Senate races. Going back
to 2008, only once has an incumbent of the president’s party run-
estimated Republican candidates, who saw surprising ning for re-election lost in the midterms in a state that voted for
over-performance in final votes. On average, final vote totals saw the president’s party in the previous election cycle. If this trend
an almost six percentage-point variance in favour of Republican holds, states that voted for Biden in 2020 with current Democratic
candidates when compared to polls, with some individual results incumbents (AZ, GA, NV) could see Democratic victories that
swinging as much as 14 points compared to polling averages. maintain the 50-50 Senate split. In this case, PA and WI could offer

Several Tailwinds at Notable Levels that Favour GOP

Multiple tailwinds, such as inflation, presidential approval, confidence in Congress, consumer sentiment, and dissatisfaction with the
direction of the US are at their highest/lowest levels at this point in time compared to previous recent midterms in ways that favour the
Republican Party.
WITHIN THE LAST 40 YEARS:

Inflation in July of a midterm year is at its highest (8.5%)

around July of a midterm year is at its lowest (38%)
Presidential Approval
(and presidential approval is even lower in many contested areas)
Confidence in Congress during a midterm year is tied with 2014 for the lowest (7%)

Index of Consumer Sentiment in June of a midterm year is at its lowest (50)

Dissatisfaction with the US around June of a midterm year is at its highest (87%)

Source: FactSet, as of 20/09/2022

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