This note was originally published at 8am on May 21, 2014 for Hedgeye subscribers.
“The people who cast the votes don’t decide an election, the people who count them do.”
A key upcoming market and economic catalyst on the horizon is the 2014 congressional midterm elections to be held on November 4th. Historically, we’ve provided extensive election analysis into the election. The next six months will be no different. Simply put, politics drive policy, which in turn drive markets.
The most famous national election surprise was probably the 1948 Dewey versus Truman presidential race. It is widely considered the greatest election upset in American history. Literally every prediction, both with and without associated polls, predicted that Dewey would defeat Truman. In fact, in late September, Gallup had Dewey with an unbelievable 17 point-lead over Truman.
Given that most pundits believed he had no chance at winning the Presidency, Truman adopted a no holds barred approach to campaigning. He attacked Dewey at every stop and “Give’em hell Harry” was consistently yelled by his supporters from the crowd. With this gusto, Truman was able to narrow the deficit, but he still lost all of Gallup’s post convention polls, was endorsed by a mere 9% of the nation’s newspapers, and 50 of 50 “experts” in Newsweek selected Dewey to win.
Many members of the mainstream media were so confident of a victory that stories were written in advance of the election that discussed the “Next President Dewey” and “The Truman Failure.” The most famous photo of the campaign was a copy of the Chicago Tribune held by President Truman that declared, “Dewey Defeats Truman,” after Truman had actually beat Dewey by a reasonable margin of 49.6% of the popular vote versus 45.1% for Dewey.
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As of now, we certainly are not of the mind that there is going to be a massive surprise in the midterm elections, although we did get your attention with the title we’re sure! In fact, with the advent of more advanced and real-time polling, a massive surprise is quite unlikely. If there is a surprise, it may well be that the Republicans may actually do better than expected. But first let’s look at how the race stands today.
According to the RealClearPolitics 2014 Generic Congressional Vote aggregate, the race is fairly tight. In fact, the Democrats currently have a slight edge over Republicans with the Democrats at 43.4 in the poll versus the Republicans at 42.8, for a positive edge to the Democrats of +0.6, but effectively is a near tie. Back in late October of 2013, this poll favored the Democrats by a spread of+6.6, so Republicans have certainly narrowed the margin.
Interestingly, if we go back to the 2010 midterm elections, this same set of polls also showed the election basically tied at this point in time (we show this in the Chart of the Day below). Ultimately, that election turned into a Republican landslide and the Republican Party won more Congressional seats than almost any “expert” predicted. Even the much avowed Nate Silver got the election wrong.
In part, what many pundits missed in 2010 was the broad disdain for Congress. That disapproval has continued to prevail and currently the RealClearPolitics Congressional Approval Poll Aggregate shows literally the lowest approval rating for Congress in the history of political polling. Currently, the approval rating for Congress is 13.7%. Needless to say, polls that ask about the Direction of the Country very much mirror this with only 28% of respondents saying the country is going in the right direction.
The other key point that many prognosticators missed in 2010 was the Republican motivation to vote. Poll after poll showed that Republicans felt much stronger about the election in 2010. As a result of this elevated enthusiasm, Republicans came out in droves. Will that happen again this year again? It may be too early to tell, but President Obama’s low approval, which is currently at an abysmal +42, is likely to motivate Republicans and not get Democrats overly excited.
Perhaps the most interesting recent poll related to potential outcomes is a Politico poll from Monday that looked at States and races that are actually in contention. In this poll the current edge for Republicans is somewhat staggering.
According to the poll, 41% of respondents said they would vote for Republicans, 34% said they would vote for Democrats, and 25% were undecided. When asked specifically about Senate races, the Republican edge increased to 43%. Further, according to this poll, approval for Obama is just 40% and almost 50% favor an outright appeal of the Affordable Care Act. Campaigning against an unpopular brand in Obama and unpopular policy in Obama Care may make this midterm strategically easier to execute on for the Republicans.
Speaking of elections, perhaps the most noteworthy one internationally is the upcoming election in the Ukraine. Currently the front runner is Petro Poroshenko, or as he is better known for his candy empire, the Chocolate King. The Chocolate King was the lone Ukrainian oligarch to join in the popular protests that led to the ousting of President Yanukovych in February, which seems to be giving him an edge with the masses.
Regardless of who is ultimately victorious in the Ukrainian election, the results will be watched very closely by the international community, especially as it relates to Russian acceptance of the outcome. Let’s just hope a relative of Josef Stalin isn’t counting the votes.
Our immediate-term risk ranges are now as follows (we have 12 Global Macro ranges with a TREND signal overlay in our Daily Trading Ranges product):
UST 10yr Yield 2.46-2.57%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research