2018 Election Aftermath

The 2018 Midterm elections have come and gone, this time with a minimum of surprises. Republicans gained a little more in the Senate than expected, while Democrats gained a little more in the House than we anticipated. But the broad contours are clear:

• Republicans held the Senate, while gaining 2-4 seats for about a 53-47 majority¹
• Democrats won the house, as their gains are expected to number in the high 30s for approximately a 233-202 majority²
• Democrats gained 7 governor’s mansions, while also flipping over 300 state legislative seats
• Democrats will likely win the national congressional popular vote by about 7%

It’s clear that there was a blue wave, given the depth and breadth of Democratic gains. But taxed with defending 10 Senate seats in states that Trump won, Democrats were only able to hold 6, losing in Florida (pending recount), North Dakota, Indiana, and Missouri.

What are the consequences of our soon-to-be divided government? For the next 2 years, major legislation is unlikely to pass. It is possible that the two parties could agree on some sort of infrastructure deal, but given the polarization between the parties, we believe that any such agreement would be limited in scope.

US equities rose 2% the day after the election, which we would as interpret as evidence that markets don’t mind, and may in fact prefer divided government. Volatility also fell sharply, as the risk of any election surprises dissipated. For better or worse, we expect nothing much to change legislatively until at least 2021, and markets are fine with the status quo.

— JMS Team

Sources:

¹The Arizona race is too close to call, and as of this writing several hundred thousand ballots have yet to be counted. The Florida race is headed to a recount, with the Republicans currently holding a lead of several thousand votes. The Senate will end up somewhere between 52-48 and 54-46.

²There are about a dozen races that have not been called yet, though in many cases one candidate has a lead that will probably be insurmountable.