Are We Bearish Enough On the Democrats Heading into the Midterms?
Last week we hosted a call with Karl Rove, former Deputy Chief of Staff at the White House, to discuss whether the midterm elections could be a major stock market catalyst. Our basic premise heading into the discussion was that if the Republicans gain enough seats, it would be a strong repudiation of the Obama administration’s economic policies and, potentially, lead to an extension of the Bush Tax Cuts, both of which would be positive for the stock market in the short term.
The discussion with Mr. Rove was fascinating on many levels, but most importantly it gave us an opportunity to pick the brains of one of the more successful political strategist of the modern era. Whether you like his politics or not, Rove has won many elections. In fact, of the more than 40 races that he has been the primary strategist for, he has won more than 80% of them. A key take way from our discussion with him was that trends matter in elections, and they are difficult to overcome in a short period of time. Further, the direction of these trends is a leading indicator for the next electoral data point. (Sound a bit like the stock market?)
While polls on an individual basis can be wrong, in aggregate they typically provide compelling insight into the electoral landscape. Currently, we are focused on four specific polls whose trends make us believe that we may not be bearish enough on the prospects for Democrats in the midterm elections. Specifically, these polls are: Presidential job approval, the generic congressional ballot, approval of Congress, and enthusiasm for voting.
Presidential Job Approval
This poll is the best proxy for how the President has been doing, and while his approval may not be a function specifically of his policy (i.e. the economy which he can’t control could be the issue), it is a reflection of how he is being perceived. The Real Clear Politics poll aggregate currently shows President Obama with a -2.5 spread on approval, which is the difference between Approve (46.6) and Disapprove (49.1). While this isn’t quite the lowest rating of his Presidency, it is right near the bottom. More importantly, he started his Presidency with a +44.2 spread and the trend since his election has been straight down.
The key implication of a negative approval rating for the President heading into the midterms is that Democrats will try to distance themselves from him, and in doing so won’t be able to use the natural fund raising and bully pulpit abilities that come along with the President campaigning on your behalf.
Generic Congressional Ballot
The Generic Congressional Ballot measures which party those polled would vote for if the choices were generic. According to the Real Clear Politics Aggregate, the Republicans have +7.8 advantage over the Democrats in this poll based on spread of 48.1 to 40.3. This is noteworthy given that in Obama’s first week in office this same measure had the Republicans at 34 and the Democrats at 48 for a +14 point Democratic advantage. This is an amazing reversal for the Republicans as we’ve seen an almost 22 point swing in preferences in just two years.
Approval of Congress
As we’ve been writing for months to our clients, the anti-Washington sentiment is as high as it has ever been in this country. The best measure for this is approval for Congress. Currently, and once again according to the Real Clear Politics Aggregate, almost 72% of those polled disapprove of Congress, while only 23% approve. This is a clear and strong statement against incumbency and since the Democrats current control the Presidency, the Senate, and the House, they are overwhelmingly viewed as the incumbents.
Voting Enthusiasm
One of the best polls we’ve seen for evaluating voter enthusiasm is the Gallup Poll that measures the “thought given to the election” by those polled. In the most recent results from this poll on September 2nd 2010, 54% of Republicans indicated they had given some thought to the election, compared to only 30% of Democrats and 32% of Independents. This is in stark contrast to this poll during the last midterm, which showed Republicans slightly lower at 53%, but the Democrats at 52%. Amazingly, the current spread between Republicans and Democrats on the measure is 24 points, which is the widest Gallup has ever measured in this poll going back to 1994.
While some Republican Party officials have recently been talking down their chances in the midterms, the numbers in the polls outlined above and in the table suggest just the opposite. In aggregate, Republicans are motivated, are being clearly favored by registered voters, and do not have the disadvantage of being led by an unpopular President. Moreover, these measures have all been trending in the favor of the Republicans for the last two years and will, absent an October surprise, likely continue to do so through the midterms.
There is a consensus view, which was shared by Mr. Rove in our discussions, is that the Republicans will take back the House of Representatives and likely not wrest control of the Senate. The question in our minds after reviewing the data and trends is: are we bearish enough on the Democrats heading into the midterms? We think not. In fact, the real October Surprise will likely be a historic win for the Republicans in which they have a strong majority in the House and take back the Senate.
That being said the wild card remains the Tea Party and their influence on the primaries as we are seeing today in Delaware with the success of radical candidate Christine O’Donnell who won the Republican nomination. As our friend Mr. Rove said last night about this victory:
“It does conservatives little good to support candidates who, … while they may be conservative in their public statements, do not evince the characteristics of rectitude and sincerity and character that the voters are looking for. … There’s just a lot of nutty things she’s been saying. …”
Indeed.
Daryl G. Jones
Managing Director
Subscribe to Hedgeye to receive research and portfolio positions in real-time.