On January 5th, 2021, Democrats unexpectedly swept the Georgia Senate runoffs, securing the Senate majority for the Democrats and returning unified Democrat control to Washington for the first time since the first two years of the Obama administration. Despite indications that the race was narrowing, the market had expected Republicans to maintain Senate control. There were four main reasons for the consensus expectation: first, Republican candidates received more total votes than Democrats in the general election; second, special elections typically have low voter turnout which has historically benefited Republicans; third, Republicans had won seven of the previous eight statewide Georgia runoff elections in the past 30 years, including two Senate races; and finally, Republicans only needed to hold one seat.
What changed to allow Democrats to win? There are numerous factors, including President Trump, but two quantifiable differences were the extremely high turnout for a runoff election and the changing demographics of the Georgia electorate. Turnout for the runoff elections amounted to 90% of the general election total vote, significantly higher than the 55% level in the two previous GA Senate runoffs. The Georgia electorate, much like many other states, is also rapidly becoming more diverse. According to data compiled by Pew Research, a nonpartisan think tank, the share of the state’s self-identified white voters is 53% today compared to 63% in 2008 – a trend that generally benefits Democrats.1
Gaining control of the Senate is a big win for Democrats and will significantly expand the Biden administration’s achievable policy goals; however, it is a far cry from the widely expected blue wave. In a blue wave scenario, according to FiveThirtyEight, an election-forecasting website, the base case scenario was for Democrats to flip the Senate, with more favorable outcomes indicating a majority of five seats or more. Within the House, FiveThirtyEight projected that Democrats would expand their 17 seat majority by at least a handful of seats and potentially more than double their seat margin. Instead, the Democrats hold a slim four-seat majority in the House and control a tied Senate through Vice President Harris’s tie-breaking vote. With such narrow majorities, every critical vote will require near unanimous agreement within the caucus – a consensus that does not exist for many progressive policy proposals. This dynamic will result in much different policy and market implications during the Biden administration than was the consensus before the general election.
The immediate effects of Democrats winning the Senate are already being reflected in the markets. The incoming Biden administration’s promise of an immediate fiscal stimulus is providing the backbone of broad market support in the days after the elections. On a more granular level, industries that are expected to benefit from favorable policies have led the market higher. Such industries include green energy companies (clean energy and environmental justice platform), materials & industrial metals companies (a multi-trillion dollar infrastructure plan), health insurance companies (ACA to be strengthened, legislation to moot the current Supreme Court challenge passed, and Medicare For All off the table). Additionally, many of the policies that could negatively impact the markets are either impossible or more limited in scope than previously expected. While the market still expects tax increases, they are expected to be just a fraction of what Biden ran on. From a regulation perspective, progressive Senators Elizabeth Warren and Bernie Sanders were previously mentioned as potential Treasury and Labor Secretary candidates. However, due to the tied Senate and the fact that Republican Governors would choose their replacements, they will not be joining the Cabinet. The financial industry and the business community are likely relieved that neither Senator will be writing regulations. In many ways, the narrow Democrat legislative majorities are poised to give market participants much of what they wanted from a Biden administration (spending and stimulus) with a lot less of what they feared (significant tax increases and increased regulations).
By this time next year, the 2022 mid-term election cycle will be starting, making vulnerable Representatives and Senators up for reelection, including Georgia Sen. Warnock, reluctant to support the most progressive Biden policies. Democrats will likely only have the opportunity to pass their most progressive policies this year, forcing the Biden administration to be judicious about what policy goals it expends political capital on and further narrowing the scope of what will be achievable.
If history is any guide, Democrats will face an uphill battle to retain control of the House and Senate regardless of the policy agenda pursued. Since 1970, the president’s party has lost, on average, 21 seats in the House and three seats in the Senate during mid-term elections. More recently, Obama lost 64 House seats and lost six seats in the Senate in the 2010 mid-terms (losing Democratic control of both chambers), and in the 2018 mid-terms, Trump lost 42 House seats (losing Republican control) though he gained one seat in the Senate. A blue wave would have significantly increased the odds that Democrats would maintain control of both chambers after 2022.
Beyond historical precedent, redistricting and gerrymandering, the process of creating state congressional districts to advantage one party, pose another threat to Democratic control of the House. In November, Democrats failed to flip many of the state legislative seats that they targeted. As a result, Republicans control more statehouses and governor mansions than Democrats, giving them total control over the redistricting of far more congressional districts. Furthermore, the Supreme Court ruled in 20192 that concerns about partisan gerrymandering “present political questions beyond the reach of the federal courts” and thus could not be reviewed by the federal judiciary. This ruling will likely embolden single-party state governments to be even more aggressive in drawing districts to benefit their party. Republicans will have complete control over redistricting in about 188 districts, including key states that are expected to gain seats and that Democrats have targeted, such as Texas, Florida, North Carolina, and Georgia. Democrats will control redistricting in just 73 districts, with the balance split between independent commissions (like California), states with split party control, and single district states.3 As it stands now, Republicans are projected to retake at least one legislative chamber and probably both, returning political gridlock to Washington – an outcome that markets would welcome.
Politics is always changing and is rapidly evolving. It is unknown what the political landscape will look like in 2022 or even 2024. Despite the punditry opining about what the Georgia runoff results mean for mid-terms, the next presidential election, Biden’s policy agenda, and the markets, it is still too early to make any meaningful long-term extrapolations. Making or changing investment decisions based on individual election outcomes is a perilous game that we do not engage in. While each administration’s policies will impact markets, the effects are often much more moderate than expected. We believe that long-term investment success comes from following a disciplined investment strategy, focused on fundamentals and valuation, that takes advantage of the opportunities presented by the disconnect between what the market fears and what is, in our opinion, the more probable outcome. Most clients’ investment horizon extends far beyond the four to eight years that any presidential administration will directly impact the markets, and our investment decisions and asset class allocations reflect that.
1 Noe-Bustamante, Luis & Budiman, Abby. “Black, Latino and Asian Americans have been key to Georgia’s registered voter growth since 2016,” Published December 21, 2020, https://pewrsr.ch/2J8aRZh
2 Rucho v. Common Cause, 588 U.S. (2019)
3 Rakich, Nathaniel & Mejia, Elena. “Republicans Won Almost Every Election Where Redistricting Was At Stake,” Published November 18, 2020, https://fivethirtyeight.com/features/republicans-won-almost-every-election-where-redistricting-was-at-stake/