The final stretch
A highly-charged and divisive election cycle draws to a close on November 6 as Americans head to the polls to elect all 435 seats in the House of Representatives and 33 seats in the Senate. State and local elections will take place as well, with 36 state governorships at stake.
The Democrats seek to regain a majority in both chambers of Congress, but their path is far easier in the House than in the Senate. Eurasia Group analysts assign a 60% probability to Democrats winning the house, but only a 15% probability for them taking the Senate.
This electoral cycle has been marked by increased voter enthusiasm on both sides. Total campaign spending likely will exceed $5 billion, far beyond the 2014 numbers. Trump's high disapproval rate is driving fundraising for Democrats, who are expected to outpace the Republicans in midterm spending for the first time in a decade.
Campaign spending has helped boost Democrats' chances, but the election outcome will rest largely on strategic turnout, including Trump's ability to motivate his base.
Independent voters will play an outsized role in these elections. The overall balance of power will be decided by a small number of key districts and states, illustrated below.
Key issues in the election
Headlines have been dominated by a number of polarizing stories ahead of the race. President Trump has focused on immigration in recent weeks, playing up the threats posed by a migrant caravan headed to the US-Mexico border. While the number of illegal border crossings have been on the decline for decades, Trump has used the issue to energize his base heading into the election.
Trade is another key issue for voters, particularly for farmers and business who will bear the brunt of tariffs. While the promised gains from a trade conflict have yet to materialize for most voters, the negative impact are becoming more visible (and have been a key theme in recent earnings reports and guidance from American companies).
Issues that voters care about have become increasingly polarized. Democrats overwhelmingly care about health care and the environment, reacting to the Trump administration's efforts to undermine the Affordable Care Act and pull out of the Paris Climate Agreement.
Meanwhile, Republicans have continued to hold illegal immigration as the most important issue facing the country, a view that few Democrats share. These trends underly the growing divides in party ideology and indicate that policymaking may be paralyzed following the election should the Democrats win the House.
Implications for policy
Macroeconomic policy and pending investigations against President Trump will likely dominate the agenda of the 116th Congress, regardless of the outcome of the midterm elections. In the case of a divided Congress, political issues are likely to come front and center.
Using Kensho Technologies' analytical software, we forecasted market reactions to the three possible outcomes of the midterm elections: Democrats win control of both chambers of Congress, Republicans retain control of both chambers, and a split legislature. The forecast was generated from analysis of market movements around historical occurrences of the scenarios in our model.
Counter to conventional wisdom, Democratic majorities in both chambers actually produced the most positive market outcomes for both of the indices in our analysis (S&P 500 and Russell 2000 small-cap index). A split legislature—our base case scenario—produced a more neutral impact on both indices.
