Democratic sweep

Bottom Line

For once, the polls were correct. Democrats ran the table in convincing fashion in four significant off-year election races last week, a development with longer-term political and financial market implications. 

White smoke in the Senate Despite the Democrats’ strong showing at the polls last Tuesday, the Senate surprisingly reached agreement last night on a compromise to end the federal government shutdown, which is now the longest in history. After 14 failed votes over the past six weeks, eight moderate Democratic Senators joined all but one Republican in a 60-40 supermajority vote on Monday to open the government. The legislation now moves to the House of Representatives for a simple majority vote as early as Wednesday, and then on to President Trump’s desk, which he is expected to sign. As a result, the federal government could re-open by week’s end. 

Importantly, the Senate’s sacrosanct 60-vote filibuster rule is safe. The legislation funds the government in a continuing resolution through January 30, 2026. It ensures federal workers get retroactive pay, rehires those terminated during the shutdown, and fully disburses SNAP benefits of $8 billion per month to some 42 million recipients. With Thanksgiving rapidly approaching, the country's 40 largest airports are experiencing 10% schedule reductions. Congress understood that flight disruptions over the holidays would have been politically disastrous. 

To be sure, Democrats were unable to extend and make permanent the pandemic-era enhanced health-care subsidies for the bottom 90% of those who get their insurance coverage through the Affordable Care Act (ACA), which was their principal demand. But Republicans did guarantee to hold a roll call vote on extending the subsidies by mid-December and debate ideas on how to create a better insurance program. 

Whither the Fed? If the shutdown does end later this week, the returning government workers will catch up on overdue work, namely the many missed data releases. By early December, we should get nonfarm payrolls and CPI inflation information for November. Soon after, the next Federal Open Market Committee convenes on December 10. It’s not clear if the Fed will trust the accuracy of this data. But given the general softening labor market and moderating inflation, we expect policymakers to err on the side of caution and issue their third consecutive quarter-point interest rate cut.

Democrats run the table by larger-than-expected margins:

• Virginia’s governor Three-term Democratic Congresswoman Abigail Spanberger crushed her opponent, incumbent Republican Lt. Governor Winsome Earle-Sears, by 14 points. The moderate Democrat, a former CIA officer, is the first woman to serve as governor of Virginia, replacing Republican Gov. Glenn Younkin, who had reached his term limit. Spanberger campaigned on “pragmatism over partisanship,” and became famous in 2021 when she castigated then President Joe Biden for spending too aggressively. “Nobody elected him to be FDR,” she said at the time.
• New Jersey’s governor Three-term Democratic Congresswoman Mikie Sherrill defeated Republican Jack Ciattarelli by 13 points. The moderate Democrat, who spent nine years as a Navy helicopter pilot, ran on a platform of making New Jersey more affordable. Because Sherrill succeeds Democratic Gov. Phil Murphy, who reached his term limit, the Democrats have held onto the governor’s office for a third consecutive term for the first time since 1961.
• California’s Proposition 50 California Gov. Gavin Newsom supported the temporary suspension of the state’s anti-gerrymandering law until the next census in 2030, to counter efforts in Texas to create five additional Republican Congressional seats. Newsom’s Prop 50 surged in deep blue California by an overwhelming 64% to 36% margin, which will likely flip five Republican seats to the Democrats in the 2026 midterm election.
• New York City mayor Democratic candidate Zohran Mamdani defeated independent candidate and former New York Gov. Andrew Cuomo 50.4% to 41.6%, while Republican candidate Curtis Sliwa trailed badly at only 7.1%. In New York City, where Democrats outnumber Republicans by a six-to-one margin, Mamdani successfully ran on a platform of making it more affordable: a rent freeze for tenants in rent-stabilized apartments; free childcare through age 5; free city buses; and city-owned grocery stores. To pay for this, he will need New York Gov. Kathy Hochul to raise taxes sharply on corporations and the top 10% of taxpayers, who may flee New York to Florida, Texas and Tennessee in response. 

Was Trump on the ballot? Perhaps he was, as exit polls from many Democratic voters said their vote was more against Trump rather than for a particular candidate or proposition. RealClear Politics polls show that Trump’s overall approval ratings have declined from Inauguration Day in January 2025 to last week’s Election Day, as have respondents’ views of his job on the economy and inflation:

• Overall After inauguration, 50.5%; after November 4 election, 43.3%
• Economy After inauguration, 46.7%; after November 4 election, 41.5%
• Inflation After inauguration, 44.7%; after November 4 election, 35.7%

Move to the center National voter demographics have shifted dramatically over just the past 17 years. In 2008, when Barack Obama was first elected president, 49% were Democrats, 26% Independents and 25% Republicans, according to Gallup. Today, Democrats have declined to only 27% of the total, with most of those lost shifting to the Independent column, which now sits at 47%. The Republican share hasn’t budged at 25%.

Midterm elections are usually unkind to incumbents In the 20 midterm elections in the post-war era, the party out of power regained an average of 25 seats in the House of Representatives. The party in the White House added to their House total only twice: Former Presidents Bill Clinton added five seats in 1998 and George W. Bush gained eight seats in 2002. At only five seats, Republicans today hold the narrowest majority in the House in a century. The Trump administration clearly understands the history of midterm elections, which is why it’s been so aggressive in passing legislation since Inauguration Day. So, Trump’s legislative window of opportunity is likely to close next Memorial Day, as members of Congress return to their districts to launch re-election bids. This is a major reason for the mid-cycle gerrymandering frenzy seen this year in Texas, California and other states. 

Schumer’s offer We suspect this historical midterm math was also behind Senate Minority Leader Chuck Schumer’s (D-NY) offer last week to vote to end the federal government shutdown in exchange for a one-year extension of the enhanced Obamacare subsidies. If the party performs in line with expectations in next year’s midterm elections, Democrats could exert more legislative pressure to make the generous ACA subsidies permanent. Not surprisingly, Senate Majority Leader John Thune (R-SD) rejected Schumer’s offer out of hand.

Midterm malaise for equities? Stock market performance in presidential election years cycle over the past 80 years reveals that quarterly S&P 500 returns are uniformly positive in 14 of the 16 quarters but are historically negative in the two middle quarters of the midterm election year. Perhaps that’s because of the uncertainty associated with the change in control of Congress, and how the new Senate and House majorities will work with the existing president. Markets eventually figure it out, and stocks historically soar from their trough in the midterm election year through the third and fourth year of the presidential election cycle.

Read more about our views and positioning at Capital Markets

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