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Will the Senate Race Cause a Market Reaction?

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MIKE TOWNSEND:  As we get to the final countdown to the midterm elections, let’s take a look at the battle for control of the Senate. Historically, midterms are terrible for the president’s party.  If you go back to 1934, the president’s party has lost an average of four Senate seats in the midterms. With Republicans holding on to a narrow 51-49 majority today, that would be more than enough to flip the Senate to the Democrat control.

But reality is more complicated than history. This November, there are 35 Senate seats up for reelection.  Twenty-six are held by Democrats, including two seats held by Independents, Bernie Sanders in Vermont and Angus King in Maine, who caucus with the Democrats. And just nine seats are held by Republicans. Here are some of the races to watch.

On the Republican side, there are four Senate seats that are very competitive—Nevada, where Senator Dean Heller is running for reelection, as well as open seats in Arizona and Tennessee, where the incumbent Republicans are retiring. The other seat to watch is in Texas, where Senator Ted Cruz is locked in a tight battle with Democratic Congressman Beto O’Rourke. 

But even if Democrats were to pick up two or three of those Republican seats they have a lot more seats to defend. And making things even more challenging, 10 of the 26 seats Democrats are defending are in states that Donald Trump won in 2016. Keep your eyes on the races in North Dakota, Missouri, Indiana, Florida, and Montana. All of those races are shown to be very tight by the polls right now.  The outcome of those races will likely determine which party holds the majority in 2019.

But here’s the important thing to keep in mind:  No matter which party wins the Senate, the margin is likely to be very close, perhaps 51-49 or 52-48, one way or the other, and that’s a recipe for more gridlock. In the modern Senate, you really need a supermajority of 60 votes to break a filibuster and control the agenda.  As a result, we don’t think that the markets will have much of a reaction to the election outcome. Even if Democrats were to win both the House and the Senate, there would still be President Trump in the White House with a veto pen. The markets likely already realize that Washington will remain bitterly divided in 2019, and that’s why we don’t expect a huge reaction after the election.

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