“We Are One Year To The Midterms And The Signs Do Not Look Good For The Democrats”

With just one year to go to the US midterm elections, which will likely be a pivotal moment for Joe Biden’s presidency as a Republican takeover of either the House or Senate would give them power to block any legislation, Deutsche Bank admits that “the signs do not look promising for the Democrats.”

As the bank’s credit strategist Jim Reid writes, only last week Dems lost the governor’s race in Virginia, a state Biden won by 10 points in 2020. He also adds that history isn’t on their side either: there’s only been one occasion since WWII when the incumbent president’s party has gained House seats in their first midterm vote, and that was when President George W. Bush still had high approval ratings following the 9/11 attacks the previous year.

Furthermore, the Democrats’ narrow House majority means the Republicans need just 5 more seats to be back in control. In the Senate, where 34 seats are up for election, the Republicans need to flip just one. If the Republicans win either chamber, legislative accomplishments would then largely rely on bipartisan agreements. It’s no coincidence that President Obama’s major legislative wins all came in the first 2 years of his 8-year presidency (when Democrats had both chambers), including the post-GFC stimulus, Obamacare, and the Dodd-Frank Act. Similarly for President Trump, his major legislative achievement in the 2017 tax overhaul was when Republicans controlled both chambers too.

Here, Reid points out that a big concern markets will have about divided government is the potential for further wrangling over the debt ceiling. The 2011 crisis saw S&P downgrade America’s AAA credit rating, and a repeat could cause further jitters. Having said that the debt ceiling has been raised or suspended 13 times since then, spanning different congressional compositions. At a minimum we’ll likely be back to brinkmanship if we don’t see a longer-term raising in the months ahead.

It would also likely put an end to any further stimulus, with Republicans already railing against the inflationary impact of Biden’s policies — a potential argument for team transitory even if there’s plenty of inflationary stimulus in the system for now. That said, 12 months is still a very long time in political terms, and if we’ve learnt anything from election outcomes over recent years, it’s that plenty of surprises could still happen along the way.

As an aside, according to online betting markets, the odds of a Republican sweep during next year’s midterms are about two in three, not what the Democrats wants to see and the clearest sign yet that the Dems will try to create a social or economic crisis to prevent this particular outcome.