ElectionWatch: Do midterms matter?

29 Aug 2018

In November, voters will head to the polls to determine the make-up of Congress for the next two years. While President Trump's name won't be on the ballot, there is little doubt that he will be on the minds of most voters as they walk into the voting booth. Markets and the economy have thrived under the current government, continuing and even accelerating the expansion that started under President Obama nearly 10 years ago.

A continued Republican government would offer the highest likelihood of market-boosting policies, in our view, but midterm elections almost always go against the party in power, and we could see the Democrats take control of one or both chambers of Congress. We believe a historically average congressional shift is most likely, and in this situation the Democrats will gain control of the House but fall short of a majority in the Senate. But the outcome is still highly uncertain, so we've evaluated four potential scenarios and assessed how each outcome could affect the political and policy environment — and how it could impact markets.

Drag the slider to change the outcome of the elections and view the investment and policy implications from CIO.

Looking at the scenarios with Mike Ryan

We outlined four possible scenarios. And we discuss how each of these could shape the political and investment environment for the next two years.

Asked and answered — Five top questions about the 2018 election

In addition to relying on the expert opinion of the UBS US Office of Public Policy, we evaluated a number of economic and political factors. Voters tend to be far more critical of the party in power if the economy is doing poorly, but Republicans should benefit in this election due to the strongest economic backdrop in decades. Democrats should benefit from President Trump's low popularity among Democrats and from a greater level of enthusiasm among their voters, but turnout will be an important hurdle and it tends to be much lower during midterms.

Based on past elections, and the makeup of the current Congress, we estimate that Democrats will need to perform very well nationally. To win a House majority, they will need 54% of votes cast; the Senate is a higher hurdle this year, probably requiring 58% of the votes on Election Day.

So far, Democrats have campaigned on the promise of investigations, and key party leaders have downplayed talk of impeachment as 'premature.’ That will change if their investigations — or the special prosecutor's report — identify charges that fit one of the Constitution's parameters: 'treason, bribery, or other high crimes and misdemeanors.' While impeachment in the House is possible if Democrats capture a majority in that chamber, Democrats would need to curry significant Republican support to convict President Trump in the Senate — an extremely unlikely outcome given what we currently know. Even so, we don't believe that this extremely unlikely outcome would represent a market risk.

Many international investors may be watching the 2018 midterms with the hope that Congress will rein in the Trump administration's more aggressive trade policies. However, this looks unlikely. We don't expect Democrats to push back against the president if it looks like he's winning. That being said, there is a possibility that they will seize upon a political opportunity to rein in the Trump administration if it looks like he's made a misstep in negotiations or if there is a sizable negative economic impact.

If Democrats win control of the House and the Senate, Congress will struggle to pass any legislation at all. This could result in an extreme form of gridlock, with both parties trying to push through policy priorities using ultimatums. This increases the risk of periodically disruptive political crises — potentially including a repeat of the 2011 debt ceiling crisis.