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Conclusion: Signs of the of anti-incumbency theme continue to flash, which should ultimately benefit Republicans in the midterms.  In addition, it should also be a positive for the healthcare sector.

With Rand Paul’s victory last night, the Tea Party has in a certain sense become main stream.   We were hashing through the primaries in our morning research meeting, and someone posed the question: What exactly does the Tea Party stand for?

Obviously a good question and their website, teapartypatriots.org, is fairly direct in its message.  According to the Tea Party’s mission statement:

“The impetus for the Tea Party movement is excessive government spending and taxation. Our mission is to attract, educate, organize, and mobilize our fellow citizens to secure public policy consistent with our three core values of Fiscal Responsibility, Constitutionally Limited Government and Free Markets.”

In his victory speech last night, Rand Paul galvanized the mainstream nature of the Tea Party as he referenced them directly in his speech.  He said:

“I have a message, a message from the tea party, a message that is loud and clear and does not mince words: We have come to take our government back.”

Rand’s victory appears to be a continuation of the Run Against Washington incumbency theme that we have been discussing.  Whether anecdotal or not, it is becoming clear that not being an incumbent has a real advantage in politics these days.  In the past month, this theme has been underscored by the following: 

  • Arlen Specter lost in Pennsylvania even though he was being backed by the sitting President;
  • As mentioned, Rand Paul beat the established Republican candidate for the primary in Kentucky;
  • Senator Bob Bennet lost his party’s nomination earlier in the month in Utah at the State Republican Convention; 
  • Two-term Democratic Senator Blanche Lincoln of Arkansas is being forced into a runoff for her party’s nomination; and
  • John McCain, the most recent Republican candidate for President, currently only has 50% of support in his primary battle in Arizona.

Typically one major incumbency challenge is noteworthy, but when every race becomes a challenge against incumbency that is a sign of an emerging sea of change.  As many studies note, incumbents typically win re-election 90% of the time.  These early data points are noteworthy and mark the beginning of perhaps a serious shift by voters away from incumbency.

This idea is also supported in recent polls.  Specifically, a recent ABC News-Washington Post poll indicated that nearly six in 10 respondents they’re not likely to vote for their current representatives to Congress.  This poll, and the evidence above, does not bode well for Democrats in the upcoming midterms – particularly as President Obama’s approval rating is mired near the lowest of his Presidency, with a 48.0 approval rating on the Real Clear Political Poll aggregate.

As the party in power, the Democrats are in effect the incumbent political party.  And with support for incumbents at generational lows, this could lead to a shift comparable to the one experienced under President Clinton in 1994, the last time incumbency support was this low.

In 1994, the Democrats went from a 57 Senators in the majority to the Republicans reclaiming the majority with 52 Senators.  On the same token, the Democrats went from a majority in the house with 258 members to the Republican’s reclaiming a majority with 230 members.

As it relates to your portfolios, the sector that will benefit most from Republicans regaining both houses is Health Care (XLV).  As our Healthcare Sector Head Tom Tobin wrote last week:

“A Republican return to the majority in the US House of Representatives this fall may be considered a big positive for Healthcare.  But as the Europeans are showing us now, budget cuts are coming to the US.  With Healthcare spending running 22% of Federal spending, it is likely that cuts will be targeted at Healthcare and other entitlement spending.   On the margin, Republicans are likely better for Healthcare private industry, but Deficit Reduction, tinged with a permanent Tea Party taste, could be an equivalent threat as the Democrat/Progressive world view.”

A shift is to the right is likely a positive for healthcare investors, but if the Tea Party movement increases then other healthcare risks increase.

Daryl G. Jones
Managing Director