Page 18 - ISQ October 2022

INVESTMENT STRATEGY QUARTERLY

Democrats pickup opportunities, as both states voted for Presi- Senate. In effect, the result of a split Congress following the mid-
dent Biden in 2020 and are currently seats held by Republicans. term elections may be the Goldilocks outcome for markets. With
Overall, the Senate should be viewed as a true battleground this this setup, any further threat of significant tax adjustments will be
fall, with prospects for its control likely coming down to individual off the table until 2025. Headline risk regarding budget/debt
race factors rather than serving as a referendum on the direction ceiling battles will also be less of a factor, as these fights are likely
of the country. to stay within Congress can be resolved there, rather than pit a
disunified Republican Congress against a Democratic White
IN SUMMARY, REPUBLICANS SEE FAVOURABLE House.
NATIONAL ENVIRONMENT, BUT DON’T DISCOUNT DEMS
While we view a scenario of Democrats controlling both the House
The overall trend in national political factors has been one of a and Senate in 2023 as the possibility with the lowest odds, this
Democratic recovery relative to the national environment seen would also be the scenario that would drive an out-sized market
earlier this year. The increased prominence of social issues, sus- reaction. Legislative risk driven by tax increases as part of the
tained labour market recovery, and the potential peak of inflation Democratic reconciliation and social policy agenda is now largely
(if the downward trend in domestic energy prices holds) alleviate viewed as a non-factor by the market given the current political
some of the pressure that has capped Democrats’ prospects. setup but would be poised for a resurgence on the off-chance that
While we continue to see material Republican gains (most likely in Democrats over-perform and maintain control of both chambers
the House), the likelihood is growing that the earlier forecasted of Congress. We caution that the electoral landscape will continue
‘Red Wave’ is dampened by a reinforced ‘Blue Wall’, particularly to be fluid up until the election, and that recent cycles have shown
when it comes to improved chances for Democrats to hold the that ‘unprecedented’ results cannot be fully discounted.

REPUBLICANS DEMOCRATS The Race for Senate
20 14

WA
WA
12
MT ME
MT 3 ND ME 4
OR 3 ND VT
VT
OR 7 MN BATTLEGROUND RACES
ID NY 3 NH
4 ID SD SD WI NY MA
29
WY 3
WY MI RI DEM GOP
3
NE IA PA NJ
NE 5 IN OH
NV UT IL IN DE AZ Mark Kelly* Blake Masters
6 UT IL 20 11 WV MD
CA CO KS MO KY WV 5 VA
KS
CA 6 MO KY 8 DC GA Raphael Warnock* Herschel Walker
55
10
TN NC
OK TN
11
AZ OK 7 AR SC NH Maggie Hassan* Donald Bolduc
AR
SC
NM 6 9
MS AL GA
MS 9 AL
6
AK LA NV Catherine Cortez Masto* Adam Laxalt
AK TX 8 LA
3
NC Cheri Beasley Ted Budd
FL
HI
PA John Fetterman Mehmet Oz
Republican Senate Seats WI Mandela Barnes Ron Johnson*
Open Seat - Current Republican *Incumbent
Democratic Senate Seats
Seats - Not Up For Election Source: Raymond James Equity Research
KEY TAKEAWAYS:
• In the midterms, Democrats are battling history and an unfavourable macro environment.
• There are signs that the floor is rising in terms of expected Democratic performance that could present a
‘Blue Wall’ of resistance.
• Political support for the Biden Administration’s regulatory agenda and the ability of the White House to confirm
candidates for top government posts rests with control of the Senate.
• Dobbs decision impacts key Senate races in terms of turnout, enthusiasm, and support from Democratic-leaning
independent voters.
• The result of a split Congress following the midterm elections may be the Goldilocks outcome for the markets.
18