Initial reflections on the US Mid-term elections

Last Tuesday the US went to the polls in a set of major elections. Voters were choosing a new House of Representatives, a third of the Senators and many state-level offices. 

Despite the President not being on the ballot, these elections received worldwide attention because their outcome could have a major impact on US policy. 

As we’ve seen in recent years, American elections move markets!

A crawl not a stride...

Before the elections, the Democrats controlled the Senate, the House of Representatives and the Presidency. In terms of political stability, these last two years should have been a breeze, on paper, there were no obstacles to getting things done. 

Theory vs reality though is a very different thing. The Democrats’ majorities were paper thin and small handfuls of politicians have been able to throw a spanner in the works at every turn, delaying, watering down, blocking and obfuscating many pieces of legislation. Nobody has been under any illusion that the legislative process has been slow these last couple of years. Despite this, a number of bills have been passed that markets have positively reacted to.  The US has therefore been able to successfully overcome market fears of instability following the 2020 election. 

It may have been at a crawl, not a stride but the US had slowly shown to the world that it had overcome the worst of January 2020.

Mixed expectations...

The US domestic economy has been turbulent in the last year, like much of the western world, rising gas prices and inflation have been hurting Americans in their pockets. Voters consistently ranked inflation as their number one concern ahead of these elections. Given this has happened under the Democrats’ stewardship, many expected them to get a kicking at the ballot box. 

Due to the US system, after two years, every president faces this set of elections and most of the time their party loses ground. However, unlike almost any other time in recent history, other social and political issues motivated the electorate. For many, the Supreme Court’s decision to overturn the abortion laws was a massive motivating factor to go out and vote. For others, the fact that there were ‘big-lie’ (the belief that Trump won the 2020 election but was defrauded) candidates on the ballot made them determined to go out and vote against them.

Given all this, going into the election, opinion polls were unable to really give a clear view of what would happen. Despite the rhetoric of a potential red-wave of republican victories, in all the crucial seats, the polls were within the margin of error, unable to truly forecast a clear result. One pollster summed it up by saying that given the data, we could expect anything from a red-tsunami to no change whatsoever.

The reality one week on...

We originally intended to publish this article last week, however, it would have been pointless at the time because so much was still up in the air. Nearly 10 days after election day, we now have a much clearer picture of what happened.

In summation, the red-wave didn’t happen and the new congress will look very similar to the last one. 

The Democrats retained the Senate with the slimmest of majorities. The notoriously difficult senators who caused problems for the leadership over the last two years remain in office (having not been up for election.) The legislative process in the Senate has therefore got neither easier nor more difficult.

The House of Representatives will see a change of control. The Republicans are almost certain to take control now, however, their majority looks set to be tiny, potentially less than 10 seats in a chamber of 435. The new controlling party is one of the most divided ever to take control. It includes moderate, pro-abortion, pro-gay marriage, secret 2020 Biden voters and far-right ‘big-lie’ supporters who in Europe would be classed as neo-fascists. Trying to get an agreement in this group on anything will be difficult and any controversial bill passed by them will be blocked by the Senate.

We look set for a period of stalemate and potential paralysis. With so many diverse opinions and a country divided 50/50 getting anything done will be difficult. The markets are still waiting for a final result until they make their thoughts clear. Given the size of the US though, they will probably give the country some space to see how it works out. If it becomes clear though that Congress can get nothing done, we can expect to see a negative reaction that will not help the day-to-day economic woes of the American people.

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