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How Did We Get Here?

Hat tip to David Byrne of Talking Heads (we’re aging ourselves). The chattering political class of Washington, D.C. and beyond is still trying to unravel the events of the past few weeks. Before we’re able to look at what the future holds for the lame duck and the 118th Congress, we need to take a quick look in our rearview mirror to understand how we got here and what that means from a governance standpoint.

 

Election Day Becomes Election Week (… or Month)

Though we’d speculated that the outcomes of the midterms, the Senate specifically, wouldn’t shake out until December 6 with a runoff in Georgia, some questions have already been answered. Sen. Catherine Cortez Masto’s (D-NV) win gave Democrats the 50th seat and keeps the majority in blue hands for two more years.

Despite their underperformance, the House will still be led by Republicans, but with a much smaller margin than anticipated. In the final weeks of the 2022 midterms, the prediction was Republicans would pick up 5-15 seats in the House. Now, we’re looking at a final tally closer to the low end of that range once vote counts and recounts are complete.

 

Empire State of “Mindlessness”

Democrats in the New York legislature overshot redistricting efforts in their state, and it may have cost them the majority. Democrat-drawn Congressional maps were thrown out by courts, and an appointed special master drew several competitive districts from the royal blue gerrymandered Democratic map. That episode, coupled with a stronger-than-expected showing by the Republican candidate for governor, propelled four new Republicans to Congress in blue districts.

We also can’t overlook the successful gerrymandering effort by newly re-elected Florida Governor Ron DeSantis (R-FL), who squeezed out four additional Republican congressional seats in the red state. These two pitfalls for Democrats, had they played out differently, could have made a big difference in the House race.

 

Our Biggest Takeaway from Election Night

While pundits are always focused on the base, advertising, and mobilization, smart money is better-placed on trends with independents and swing voters.

Given the resistant polarization of our nation, the Republican and Democratic wings of our electorate are called the base for a reason—they typically don’t budge. Historically, it’s been this way since the 1990s. Now though, with more people rejecting party labels and identifying as Independent, most savvy candidates for public office focus their appeal on this burgeoning faction of the electorate—while also making sure their base turns out.

In many exit polls this year, we saw critical blocs breaking toward the Democrats over Republicans by 47-44% (despite their concerns over the economy). In past midterms, they’ve broken toward the opposition party in double digits.

 

Ch-ch-changes Ahead

A divided Congress likely means several issues are off the table for the next two years, including tax increases, fiscal stimulus, and the reconciliation process. Though President Joe Biden will continue to appoint judges and fill vacancies at the federal agencies and commissions, he won’t be able to move much of his agenda on Capitol Hill—a stark contrast to the past two years. We anticipate the House and Senate will only be able to focus on the federal budget, debt ceiling, defense spending, and a handful of issues in which there could be a rare outbreak of bipartisanship.

 

McCarthy’s Maelstrom

That being said, there will be limits to any bipartisanship as the next Speaker, who is likely, but not assuredly, current Republican Minority Leader Kevin McCarthy (R-CA) will be faced with the slimmest majority since the 1930s. The incoming Republican Speaker will have to balance the ultra-conservative Freedom Caucus wing of the House Republican Conference (~30-40) with a fledgling wing of moderates (~15-20), some of whom hatched this election cycle due to their wins in purple districts nationwide and blue districts in New York.

It’s likely that the House will spend most of its time on hearings, oversight, and investigations, when we know Americans are clamoring for solutions to economic concerns.

 

Lame Duck or Turducken?

Congress still has plenty of ground to cover in the upcoming lame-duck session of Congress that began on November 14 and runs through December 22 (the tentative holiday recess). The current continuing resolution (CR) funding the government will run out on December 16.

Now that uncertainty over control of the Senate is settled and the December 6 Georgia runoff isn’t critical to determining the majority, Democrats can focus on leveraging the next few weeks. Senate Majority Leader Chuck Schumer (D-NY) and House Speaker Nancy Pelosi (D-CA) will likely try to stuff the lame duck with as much legislation as possible given that Schumer will be butting heads with a Republican Speaker for the next two years.

There’s no great incentive for House Republicans to cooperate in the lame duck. The more conservative wing of the conference will push to shape, or rather cut, spending when they take the gavel on January 3, 2023.

Our current prediction is that Democratic leadership, with the cooperation of a handful of Republicans, will want to tackle as many “must-pass” priorities as possible in the lame duck to clear potentially volatile issues off their plates for the next two years:

  • Omnibus federal spending/CR
  • National Defense Authorization Act (sets defense policy for 2023)
  • Debt ceiling (expected to hit 3Q 2023)
  • Healthcare bills (mitigates Medicare cuts, extenders)
  • Tax extenders
  • Secure and Fair Enforcement Banking Act (potentially the last chance for cannabis legislation)
  • Energy-permitting reform
  • Ukraine aid
  • Judges and nominations (expiring at the end of the 117th Congress)
  • Electoral Count Act reform

 

Less Is More

If the lame duck proves to be productive, then we’re looking at a very minimalist Congress (from a legislative standpoint) for 2023-24. In the event that it’s not, then Schumer and the Republican Speaker will have their work cut out for them.

We’ve said before that Biden’s agenda on Capitol Hill is largely obsolete, and we stand by that rationale. With a narrow majority in the House, McCarthy will resort to passing legislation that garners 218 votes (just enough to pass), and legislation will morph into messaging for the next two years as his Speakership will be hamstrung from the start. Schumer and the Democrats in the Senate will try to carry some legislative water for Biden, but will mostly focus on judges, “must-pass” legislation, and deflecting whatever arrows the House flings across the dome.

Regardless, the focus will soon shift to the executive branch and the regulators to advance the Biden policy agendas through oversight, regulation, and enforcement—which isn’t atypical for the final two years of a presidency. Republicans in Congress can’t stop them from forging ahead, but they can gum up the works.

 

Just When You Thought it Was Safe

The 2022 midterms aren’t quite over, and we’re already pivoting to Election Day 2024. The race for the Republican nomination is underway as a wounded former President Donald Trump announced his presidential intentions. A new generation of electable alternatives won’t bend the knee, but will instead challenge the former president who created the platforms for their success. Elections are about the future, and we believe that if the Republican party wants to win the keys to 1600 Pennsylvania Avenue, they’ll move past the former president and choose one of his acolytes.

Biden will turn 80 this month, and we don’t envision him stepping aside unless Trump exits the stage by choice (or loss). While there’s considerable angst within the Democratic party with an octogenarian at the helm of their 2024 ship, the outcome of the midterms has given Biden a lifeline.

Lastly, Democrats shouldn’t get too used to control of the Senate as the 2024 map is full of minefields. Democrats will be running for 21 incumbent seats vs. 10 for the Republicans (FIGURE 1). A sampling of the seats the Democrats must defend: Arizona, Pennsylvania, Nevada, Wisconsin, Ohio, and Michigan (stop us if you’ve heard this before), in addition to red states Montana and West Virginia. Two seats are held by Independents.

 

FIGURE 1

Incumbents in 2024 US Senate Races

 Source: Axios

Talk to your financial professional to help make sure your portfolio is prepared for whatever happens in Washington D.C. 

 

 

The views and opinions expressed herein are those of the author, who is not affiliated with Hartford Funds. Hedgeye Potomac Research is not an affiliate or subsidiary of Hartford Funds.

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About The Authors
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Senior Policy Analyst, Hedgeye Potomac Research

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