US stocks levitated for much of Tuesday's session as voters took to the polls in a midterm election that has seen one of the biggest turnouts in recent history, and has been dubbed "the most important midterm election in generations."
At stake is control of the House and Senate, which, if Wall Street analysts' "baseline" expectations are to be believed (expectations that are based on polling data from the same firms that spectacularly failed to predict the rise of President Trump) Democrats will pick up at least 30 House seats - seven more than the 23 needed to flip control of the chamber - while Republicans pick up anywhere between two and four Senate seats (enough to shore up their razor-thin 51-49 majority).
The first polls will close in parts of Indiana and Kentucky at 6 pm ET, followed by Georgia (though polls in Gwinnett County could remain open due to voting machine complications), South Carolina, Vermont, Virginia, as well as parts of Florida, Indiana, Kentucky and New Hampshire at 7 pm. North Carolina, Ohio and West Virginia will follow at 7:30 pm ET. Polls in Alabama, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, Oklahoma, Pennsylvania, Rhode Island and Tennessee will close at 8 pm, while polls in Kansas, Michigan, New Hampshire, North Dakota, South Dakota, Texas and parts of Florida will close at 8 pm. By this time, investors should know whether Republicans will retain control of the Senate. Polls in Arkansas will close at 8:30 pm, while polls Arizona, Colorado, Louisiana, Minnesota, Nebraska, New Mexico, New York, Wisconsin, Wyoming, parts of Kansas, Michigan, North Dakota, South Dakota and Texas will close at 9 pm.
Polls in Iowa, Montana, Nevada and Utah, as well as parts of Idaho and Oregon, will close at 10 pm. Polls in California, Hawaii and Washington, as well as parts of Idaho and Oregon close at 11 pm. Finally, polls in Alaska close at midnight (poll closure times courtesy of the Seattle Times).
The New York Times formatted all of this information in a visual context:
For anyone who wants to stay abreast of exit polls and election results in real time, Fox News has published a live feed that will go live at 5:30 pm ET:
Alternatively, for those who want to fast forward to the election's result immediately, here is MSNBC:
As shown previously, here's a breakdown of the key races on an hour-for-hour basis between 6 pm and midnight:
The main event in the first states to close will be the Indiana Senate race, where Democratic incumbent Senator Joe Donnelly holds a slim lead in polling over Republican Mike Braun, but has only averaged about 44% in absolute support.
Florida and Virginia are likely to be most in focus. An upset win by Republican Governor Rick Scott over Democratic Incumbent Senator Bill Nelson would all but ensure a Republican Senate majority.
In the House, if Democrats cannot win the Republican-held seat in FL-27, they might not be on track for a majority after all. On the other hand, if Democrats win FL-26, they could be on track for a slim majority, and if they win FL-15, they could be on track for a large majority. In Virginia, there are three bellwether races: If Republicans hold onto VA-10, they might have a very good night. If they hold onto VA-07, they have a shot at maintaining the majority. By contrast, a Democratic win in VA-02 would signal a more substantial Democratic majority is likely.
Incumbent Democratic Senators Brown (OH) and Manchin (WV) appear very likely to win reelection but an upset would all but guarantee a Republican Senate majority. In the House, if Democratic challenger Dan McCready can wrest NC-09 from Republican control, Democrats will likely be on track for a majority. Democratic wins in NC-02 or NC-13 would send just as strong a signal. Democratic wins in OH-01 or OH-12 would suggest a Democratic majority is likely as well.
The outcome of the Senate majority should start becoming clear by 8pm. If Democratic incumbent Senator Claire McCaskill wins another term, it would be difficult for Republicans to gain net seats and could, depending on how other races go, keep open the path to a narrow majority. That path would also likely run through Tennessee, where former Governor Phil Bredesen is challenging Rep. Marsha Blackburn for the open Republican-held seat. Short of winning in Tennessee, Democrats would need to win the Senate seat in Texas held by incumbent Senator Ted Cruz, which looks even more challenging. If Democrats cannot win Missouri and Tennessee (or Texas) they are unlikely to win the Senate majority.
In the House, if a "blue wave" has formed it should be apparent in the results from states with polls closing at 8:00pm. Four Republican-held seats are expected to flip to Democrats as a result of redistricting in Pennsylvania (PA-05, PA-06, PA-07, PA-17), with another expected to flip to Republicans (PA-14). PA-01 could be a bellwether; if Democrats cannot win in this Clinton-won district they might have trouble winning the majority. In New Jersey, Democrats look likely to pink up at least 3 or 4 seats (NJ-02, NJ-03, NJ- 07, NJ-11); if they cannot manage to win more than two, Republicans might hold onto the majority. In Texas, the outcome in TX-32 should be watched; that district narrowly supported Sec. Clinton in 2016 at the same time it voted for Republican Rep. Pete Sessions by more than 50%. A Republican loss here would signal a high probability of a Democratic majority.
At this point the general direction of the House elections should have become clear, but the Senate might still be in play. The main focus will be the Republican-held seat in Arizona, which Is the Democrats' best pick-up opportunity in the Senate this year.
Control of the Senate should become clear with the races that close at 10pm ET. Democratic Senator Heidi Heitkamp (N.D.) trails in most polling, but Democrats have a shot of offsetting a potential loss there with a pick-up in Nevada, where the race is close to tied. Incumbent Democratic Senator Jon Tester leads polling in his reelection effort, but with a fairly narrow margin.
If the House majority is shaping up to be a close call, the results in California and Washington state could be decisive. Democrats probably need to flip at least 3 or 4 of the Republican held seats in California and Washington to win the majority. This might not be too much of a challenge, given how many of these Republican-held seats voted for Hillary Clinton in 2016.
Partly due to the enthusiastic turnout driven by the intensely divisive campaign, chaos has erupted at polling places across the country as voting machine malfunctions (some of which were caused by equipment issues, and others by plain-old incompetence) drew intense media scrutiny. Four of the 156 polling stations in Georgia's Gwinnett County - a crucial battleground in Georgia's narrowly contested governor's race - shut down temporarily because - get this - officials didn't bring power cords to charge the machines that generate Georgians electronic voting-ID cards. Voters were eventually given the option to vote with paper ballots at three of the four sites.
NBC News has confirmed that the issue at Anderson Livsey Elementary in Snellville, GA was indeed a lack of power cords. Gwinnett County Director of Communications Joe Sorenson tells @NBCNews “the machine was not supplied power and was running on battery & the battery ran out” 🤔 https://t.co/YFa45nihXs— Ayman Mohyeldin (@AymanM) November 6, 2018
The New York Times described Gwinnett as a "rapidly diversifying patchwork of suburbs" that was a Republican stronghold for decades until Hillary Clinton carried the county in 2016. The county is reportedly asking a judge about extending the voting hours past the 7 pm closing time. Problems voting were also being reported in other states, including Pennsylvania, Tennessee and Arizona.
For the Democrats to wrest control of Congress and usher in an era of divided government, Democrats need to win at least 23 seats to flip the House; 2 seats would be needed to flip the Senate.
As Goldman pointed out earlier, the Democratic advantage in the 23rd through 26th seat averages less than 1pp, suggesting that from a bottom-up perspective the outlook for the House is fairly uncertain. Though at the very least, Democrats have history on their side, since the president's party typically sees an electoral wash in the midterms following a presidential vote.
Though it is harder to infer powerful trends from historical experience. This cycle, the election map looks very favorable to the Republicans. Of the 35 seats being contested, 26 are currently held by Democrats. Of those Democratically-held seats, 10 are in states that voted for Donald Trump in 2016. In contrast, Republicans are only defending eight states, and only one of those voted for Hillary Clinton. Deutsche Bank laid out the electoral map in the chart below.
In addition to voting for House, Senate, statewide and local races, referendum questions on issues ranging from marijuana decriminalization to abortion access are appearing on the ballot in several states. Here's a roundup of some of the more high-profile issues, via the New York Times.
- Legalizing the recreational use of marijuana is on the ballot in Michigan and North Dakota. The North Dakota initiative, Measure 3, would also expunge marijuana convictions from criminal records; the Michigan initiative, Proposal 1, would not.
- Medical marijuana is on the ballot in Utah and Missouri. Missouri has three separate initiatives that would legalize medical marijuana: Amendment 2, Amendment 3 and Proposition C.
- In Washington State, voters will weigh in on Initiative 1631, which would charge companies and utilities that burn fossil fuels $15 for each ton of gases they produce (the penalty would rise over time). It is one of several ballot measures across the country that aim to fight climate change, including a statewide fracking ban in Colorado and renewable energy requirements in Arizona and Nevada.
- A ballot initiative in Massachusetts, Question 3, will ask voters if they want a landmark 2016 transgender rights law to remain on the books. The law, which was passed by the Democratic legislature and signed by the Republican governor, prohibits discrimination based on gender identity in public places, like bathrooms. Question 3 is the first-ever attempt to undo a transgender rights law at the ballot box.
- In Washington and Oregon, voters will decide on measures to prohibit local taxes on food sales. Companies like Coca-Cola and PepsiCo have backed those initiatives as a way to combat taxes on sugary drinks like soda, which are an increasingly popular public health tool.
- Voters in West Virginia and Alabama will decide on constitutional amendments that would specify that there is no guaranteed right to abortion in those states. The proposals would not ban abortion if they were to pass, but that could change if Roe v. Wade were someday overturned.
Having reviewed the possible scenarios that lie ahead, it's time to take a look at what lies ahead for markets: to assess the medium-term market impact of the midterms and recommend trade ideas, SG strategists worked under three different scenarios according to the election outcome.
- Scenario 1: Gridlock - GOP Senate and DEM House (most likely): Markets would fear that economy would be more vulnerable from now on with the absence of any further economic stimulus in the event of economic slowdown.
- Scenario 2: Blue Wave - DEM Senate and DEM House: Markets would stir on speculation of a lame duck presidency and potential impeachment proceedings. Potential upside risk on Infrastructure.
- Scenario 3: Red Wave - GOP Senate and GOP House (least likely): The least expected scenario for the market, which would probably trigger a short-lived risk-on environment. Trade tensions and Fed tightening will quickly be back in the market focus
In conclusion, SocGen's US strategists summarized the most likely market outcomes stemming from the three potential elections scenarios as follows:
Looking ahead, barring no major upsets, analysts at Deutsche Bank and other Wall Street banks see potential for the market to rally into the end of the year, with some analysts who were only recently calling for an extended losing streak now seeing potential upside of between 11% and 14%. But then again, with so much uncertainty between now and then, market returns - and analysts' expectations - could shift dramatically between now and then.