What To Expect When You’re Electing

Thousands of congressional, state, and local elections will take place on November 6^th, less than a week from now. There will be plenty of time afterwards to discuss how the election results may affect the political process, foreign relations, economic growth, or your portfolio, but for this piece we are simply looking to get a lay of the land.

The conventional wisdom for Congress is that the Democratic party will gain enough seats to take over the House of Representatives, whereas the Republican party will retain or even strengthen its grip on the Senate. There is a sound basis behind these beliefs—President Trump remains moderately unpopular, as his approval rating is underwater by about 10 points¹. Given this circumstance, and the fact that the president’s party typically loses seats in a midterm election, and it is no surprise that Democrats are a likely bet to pick up the 25 seats needed for House control.

The Senate, however, is a different story, as the benefits for Democrats of being the out party are overwhelmed by the historically unfavorable map facing them. Democrats have 26 seats up for election, with 10 of these seats belonging to states Trump won in 2016. Republicans have just 9 seats up for election, with only 1 from a state that Clinton won in 2016. Of the 10 Democratic seats in Trump states, 5 are in states that Trump won by double digits.

However, it is important not to be too presumptuous about these expected results. If you’re rolling dice, you wouldn’t be shocked at rolling a 6, even though the chances of doing so are less than 17%. Similarly, if you look at election forecasts, a likely outcome in no way means a guaranteed outcome. The website fivethirtyeight.com currently assigns probabilities of Democratic control of the House and Republican control of the Senate as 86% and 83%, respectively, but that means there’s nearly a one in three chance that one party will sweep both chambers.

We saw a lot of pundits fail to understand probabilities in 2016, as they first erroneously assumed that Hillary Clinton would defeat Donald Trump, and then compounded their mistake by blaming the polls afterwards. Polls are not oracles—they showed Clinton with a modest lead over Trump, and indeed she won the national popular vote by 2%. But Trump was always within striking distance in the polls, and all it took was a moderate over performance in a few key states for him to win. Blaming the polls for failing to predict Trump’s win is like saying your dice are loaded after you roll a 6.

With House or Senate races, the margin of error is even larger. G Elliott Morris, a data journalist at The Economist, has stated that historical polling averages in House races have a margin of error of +/- 15 points². Even if polls now have improved accuracy, they will likely never be able to yield precise predictions with respect to elections. Sample sizes are limited, as Congressional elections are held only every two years. Turnout is unpredictable—we know it will be higher in presidential years than in off-years, and we know the out party is likely to benefit during this off-year, but the magnitude of these effects varies from election to election. Undecided voters are still numerous, with about 10% of voters undecided in the extensive recent polling by the New York Times and Siena College³. Moreover, small shifts matter a great deal—an extra 500 votes in Florida in 2000 would have resulted in President Al Gore, and an extra 500 votes in Minnesota in 2008 for Norm Coleman would have meant Democrats would have lacked a filibuster-proof majority to pass Obamacare.

With respect to this year, a polling error of just 2-3% could mean that Republicans hold the House or that Democrats retake the Senate. A polling error of 5% could mean that Republicans expand their Senate margin by several seats or that Democrats win 50+ House seats in a landslide election.

Oh, one last thing—don’t be quick to attribute the market’s movements to the political news of the day. President Trump’s claim that the recent skid is due to the market’s fear that Republicans will lose control of Congress is simply unsupported—after all, Democrats have been favorites for some time now to take the House, so why would markets panic now? On the other hand, liberal economist Paul Krugman erroneously argued after the 2016 election that the stock market would slump4.

We believe that the same qualities that yield a reasonable analysis of the upcoming election are also those that help build you a robust portfolio. For example, US equities have had high valuations for some time, which means we would expect lower than average returns over the next decade. But we certainly wouldn’t bet your entire portfolio on that outcome! We believe in a diversified portfolio, using all the information available at the time, seeking a client-tailored appropriate balance of risk and reward. We can’t predict the future, but we can prepare ourselves for it.

As for politics, polls are meaningful, but expect the unexpected. In the meantime, whatever candidates you support, please head to the polls this Tuesday, November 6^th.

— JMS Team

Sources:

¹https://www.realclearpolitics.com/epolls/other/trump_favorableunfavorable-5493.html or https://projects.fivethirtyeight.com/trump-approval-ratings/?ex_cid=rrpromo

²https://twitter.com/gelliottmorris/status/1054912747199184896

³https://www.nytimes.com/interactive/2018/upshot/elections-polls.html

⁴Krugman, to his credit, did retract his claim fairly quickly

JMS Capital Group Wealth Services LLC

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An SEC‐registered investment advisor.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. Certain material in this work is proprietary to and copyrighted by Carson Group Coaching and is used by JMS Capital Group Wealth Services LLC with permission. Carson Group Coaching is not affiliated with the named RIA. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting and legal or tax advice. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.