Making sense of the Senate elections
by Michelle Wan, CFA, Investment Strategy Analyst and Gary Schlossberg, Global Strategist
- Election-year arithmetic favors the Democrats with just 12 seats up for election compared with the Republicans’ 23 seats, and with a chance to pick up as many as 9 of those GOP seats — based on the number of contested Republican seats rated by the Cook Political Report as a toss-up or leaning Democratic.3
- One-party government, we believe likely achieved with a Democratic majority in the Senate, may open up a wider array of policy changes now largely confined to executive mandates under our currently split government. However, a combination of minority Republicans and a sizable moderate contingent of Senate Democrats would be capable of blocking more extreme proposals by the Democrats’ progressive wing.
- Taken together, we believe that the policy and economic backdrop will continue to favor a balanced portfolio geared, on the equity side, toward U.S. large- and mid-cap equities and high-quality sectors, such as Information Technology, Communication Services, Consumer Discretionary, and Health Care.
Nearly lost in the unfolding drama of the presidential campaign are U.S. Senate contests that are key to one-party rule, which is capable of shaping the scope of legislation in the next four years. The Republicans currently control the Senate majority, by a count of 53-47 seats, but that balance likely will change in the upcoming elections.
Republicans are more exposed to losses in the Senate than the Democrats. Democrats need a net gain of 4 seats for a Senate majority, or just 3 with a Democratic vice president casting tie-breaking votes. According to the Cook Political Report, only 14 of the 23 Republican Senate seats up for election in November are viewed as solid, likely or leaning toward the party compared with 11 of the 12 Democratic seats up for a vote.1 In addition, recent poll movements also favor the Democrats. Two separate polls — one by the Economist and the other by website FiveThirtyEight — show the probability of the Democrats regaining control of the Senate at around 75% in the latter part of October.2 As indicated in the chart below, at least one polling group shows the probability of a Senate majority now at 73%.
Chart 1. Average polling result: Democratic versus Republican Senate control
Senate results have often been tied to the presidential race in two ways. First, research has shown split-ticket voting for the Senate has become less common over the years, suggesting a Democratic majority in the Senate with how well Biden does in the voting. Second, voter turnouts of more than 56% in presidential elections back through 1960 have been associated with a one-party government.4
Why the Senate is important
The Senate’s unique powers include its authority to approve presidential appointments to the federal and Supreme courts by a simple majority vote. In turn, decisions by judges with lifelong tenures could influence policies ranging from immigration and labor unions to business regulation, climate change, and health care.
Approval of Federal Reserve and other regulatory nominations plays a critical role in shaping policies critical to the success of a presidential administration, as do treaties approved by the Senate. One potential hurdle to a Democratic agenda is what could be a fairly even split in the Senate between the party’s progressive and moderate wings. Even more imposing is the 60-vote supermajority requirement to pass most legislation.
Both parties have worked to circumvent existing rules, increasingly through a parliamentary “nuclear option” procedure in which the majority leader overrides a standing supermajority requirement for legislation in favor of a simple majority. Extending the simple-majority requirement beyond votes on budget reconciliation, trade agreements, base closure decisions, and court nominations, to which it now applies, would open up opportunities for broader tax and spending reforms outlined in Republican and Democratic Party platforms.
Nonetheless, we believe the “nuclear option” likely would be used by majority Democrats sparingly because of the Senate’s large constituents of moderate Democrats and Republicans capable of blocking this extreme procedural measure and, more generally, the party’s more extreme proposals. Taken together, we believe that the policy and economic backdrop will continue to favor a balanced portfolio with the specific preferences outlined in the investment implications on page 7 of this report.
An Electoral College primer
by Michael Taylor, CFA, Investment Strategy Analyst
- Established by the Constitution and ratified by the 12th Amendment, the Electoral College (EC) is the formal body that elects the president and vice president of the U.S.
- A presidential candidate needs 270 electoral votes to win the election.
- States with the largest electorates include California, Texas, New York, and Florida. We look for Battleground states with sizable electorates, like Pennsylvania and North Carolina, to potentially help steer the election.
What is the Electoral College?
As November 3 approaches, the odds of a tight or even contested election appear to be a significant possibility. In a close race, the popular vote could point to one candidate but the Electoral College (EC) could name the other candidate as the winner. In fact, in two of the past five presidential elections, it was the Electoral College, and not the popular vote, that determined the winner. But what exactly is the EC and how does it work?
Established by the Constitution and ratified by the 12th Amendment, the EC formally elects the U.S. president and vice president. In 1804, the EC was refashioned to distribute political power away from the most populous states to less-populated ones. Today, the number of electors matches the number of representatives (435) and senators (100) plus 3 electors for Washington, D.C., for a total of 538 members. A presidential candidate needs 270 electoral votes to win the election.
The number of electors per state is based on a state’s population. States with the most electoral votes are California, Texas, Florida, New York, Illinois, and Pennsylvania. Since 1988, California and New York have voted Democratic and Texas has voted Republican. The Rust Belt states that were disproportionally affected by offshoring of manufacturing over the past few decades — Ohio, Michigan, Indiana (11 electoral votes, see Table 1), and Wisconsin (10) — have fairly sizable electoral votes and have often served as battleground states for presidential campaigns.
Table 1. Top 10 states with the most electoral votes
Florida and North Carolina have also been common battleground states. In 2000, it took nearly five weeks and a 5-4 Supreme Court ruling to call the Bush-Gore election. Ultimately, Bush beat Gore in Florida by a mere 537 votes to win the election. This is why candidates have targeted battleground or “swing” states, where the electoral votes could steer an election outcome.
Each state legislature is free to choose its method for awarding electoral votes.
Currently there are two:
Winner-take-all system: Forty-eight states and Washington, D.C., use this method. The candidate who wins a majority of a state’s popular vote receives all of the state’s electoral votes, regardless of how wide or narrow the victory. For example, if Biden were to win in Illinois, he would claim all 20 votes from the state’s electorate.
District system: Maine and Nebraska use this method. One electoral vote is awarded to the candidate who wins the popular vote in each congressional district, and the remaining two electoral votes (from the senators) are awarded to the candidate who received the most votes statewide.
Tiebreaks and succession plans
In the current system, a 269 split vote is possible. In the event of a tie, or if neither candidate secures a majority of the 538 electoral votes, the House of Representatives decides the outcome. Each state delegation casts 1 vote, and a simple majority of 26 votes is needed to win. The Senate would determine the vice president with each senator casting 1 vote, and 51 votes are needed to win.
It is unclear how this year’s election will unfold. With the potential for delays in vote tallies, the possibility of a disputed outcome is growing. In a contested election, the 1887 Electoral Count Act stipulates electors must be chosen no more than 41 days after Election Day: December 14, for this election. If the outcome remains undecided by Inauguration Day, the Presidential Succession Act of 1947 provides for the performance of the duties of the president in case of the removal, resignation, death, or inability of the president and vice president. In this case, the speaker of the House would assume the position of acting president until a winner is determined.
Could the Electoral College be abolished?
Although only 5 of the 58 U.S. presidential elections were won by candidates who lost the popular election (1824, 1876, 1888, 2000, and 2016), calls for abolishing the EC and electing a president by popular vote resurface periodically.5 But abolishment would require a constitutional amendment approached in one of two ways:
- Congress could propose an amendment by a two-thirds vote of both chambers. The amendment must then be ratified by legislatures of three-fourths of the states.
- Two-thirds of state legislatures could petition Congress to convene a Constitutional Convention. At the Convention, any part of the Constitution, including the EC, could be amended. A proposed amendment must then be ratified by three-fourths of the states. This method of ratification has never been invoked.
Although it is not impossible, we believe abolishing the EC would be an extraordinarily difficult feat to achieve.
Keeping perspective if election results are delayed
by Tony Miano, Investment Analyst and Paul Christopher, CFA, Head of Global Market Strategy
- A large proportion of voters plan to vote by mail this year, and that emerging trend creates the possibility that the two parties may choose to challenge the results in court.
- Despite the unprecedented number of likely absentee ballots, we see a number of reasons why a contested election is likely to have a temporary and limited financial market impact.
- We favor keeping focus on the economic trends that are in place now and that are likely to be the main drivers of markets after Election Day. We provide specific preferences for portfolios.
Contesting the elections
As concerns regarding COVID-19 linger, early and absentee voting is poised to continue its meteoric rise. But as the prevalence of absentee and early voting has grown in 2020, so too have concerns surrounding a potentially contested election.
Preparation and COVID-19 are two main considerations. Only 34 states allow processing of absentee ballots prior to Election Day, generally being limited to opening outer envelopes, verifying signatures, and checking bar codes, with Pennsylvania, Wisconsin, and Michigan being key battleground states absent from this list.6 Even fewer states allow ballot counting before Election Day. Also, COVID-19 fears may keep experienced poll workers away from their usual posts.
In addition, many more Democrats than Republicans have requested mail-in ballots this year.7 We believe this difference may fuel worries that Election Day results may reverse once officials tally all the mail-in votes.
Finally, the mail-in process is complex enough that mistakes by voters and poll workers are likely, which gives both parties a strong incentive to challenge the results in the courts.
But extreme scenarios may skip over less tumultuous possibilities:
- Many states prepared all summer for the surge in absentee ballots and may need only days to report, not weeks.
- States that count in-person and mail-in ballots together on Election Day may not show reversals in the results after counting all the mail-in ballots, even if the counting extends to multiple days.
- If one party or candidate takes a commanding lead, there may be little doubt as to the winner, even if the final tabulations for all 50 states extend beyond Election Day.
- How a voter casts a ballot and whether he or she votes are different questions. Put differently, high voter turnout can benefit either party and, therefore, the mail-in ballots will not necessarily determine the eventual winner.8
Also, the constitutional structure should work to limit the market impact of any delay. According to the 20th Amendment, Congress is scheduled to meet on January 6, 2021, to certify the Electoral College results for a presidential election winner. If vote-counting challenges leave the electoral result ambiguous, then the sitting speaker of the House will be inaugurated as acting president, until the courts, state authorities and Congress resolve the ambiguities.9 In the interim, the government should continue to function and the economy can continue to recover.
History suggests that delayed results are temporary and we believe that markets may take the wait in stride. The most recent example is the 2000 presidential election, in which a close race needed five additional weeks to find a winner but without driving equity market prices higher or lower with every wrinkle in the legal procedure.10
A second example is older but we believe echoes particularly today. The presidential election of 1876 was very close and turned on disputed returns from Louisiana, Florida, South Carolina, and Oregon. Despite the deep political divisions of that Reconstruction period, the Democratic-controlled House and the Republican-dominated Senate created a bipartisan committee of House members, senators, and Supreme Court justices in February 1877 to settle the dispute. Rutherford B. Hayes won by one electoral vote, and Congress preserved the integrity of the system.11
We anticipate financial market turbulence in the immediate aftermath of the election may be significant but is likely to be temporary. As long as the courts and Congress play their role in fairly adjudicating these cases, as in the past, then an election result eventually should arrive.
We maintain our guidance, which focuses less on election results (we believe will likely delayed but temporarily so) and more on the economic trends that should continue after the election:
- Overweighting U.S. compared with international financial markets
- Tactically adding a small weight to commodities, including gold
- Overweighting U.S. large- and mid-cap equities compared with long-term strategic allocations, but taking small-cap equity positions to long-term strategic weights
- Focusing on U.S. equity sectors that have a combination of better cash flow, earning potential, and attractive debt
- Emphasizing credit and municipal securities — but using credit managers to help shift out unattractive individual credits
1 2020 Senate Race Ratings, The Cook Political Report, October 13, 2020
2 Newsweek, October 23, 2020
3 2020 Senate Race Ratings, The Cook Political Report, October 13, 2020
4 Dr. Michael McDonald, University of Florida, United States Election Project, 2020
5 “5 Presidents Who Lost the Popular Vote But Won the Election,” July 23, 2020, https://www.history.com/news/presidents-electoral-college-popular-vote
6 “Absentee and Mail Voting Policies in Effect for the 2020 Election,” National Conference of State Legislatures, October 9, 2020
7 Lauren Egan, “Democrats requesting absentee ballots outnumber GOP in key swing states,” NBC news, September 4, 2020
8 Data compiled by the Federal Election Commission shows that Republican voter participation rose in 2004 and 2016, while Democratic voters surged in 2008; “Election Results for the U.S. President,” Federal Elections Commission, December 2017 – June 1993
9 Edward B. Foley, “Preparing for a Disputed Presidential Election: An Exercise in Election Risk Assessment and Management,” Loyola University Chicago Law Journal, Winter 2019, pages 321 – 335
10 “Institute Alert: Keeping Focus in the Final Stretch of the Election Season,” September 29, 2020
11 History, Art & Archives of the U.S. House of Representatives, https://history.house.gov/Historical-Highlights/1851-1900/The-electoral-vote-count-of-the-1876-presidential-election/
Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.
Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).
Investments in gold and gold-related investments tend to be more volatile than investments in traditional equity or debt securities. Such investments increase their vulnerability to international economic, monetary and political developments. They are also exposed to the risk of severe price fluctuations in the price of gold bullion.
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