From now until Nov. 2, everything coming from Washington will be aimed at the crucial House and Senate elections, which have the potential to be a tsunami, like the one in 1994 that swept Newt Gingrich to power in the House.
If the election were held today (it won’t be), the Republicans would take control of the House; they need 39 net seats and something like 45 looks likely. The magic number in the Senate is ten, which seems like a long-shot; a GOP pickup of 5-to-7 seats seems probable there.
As I have written here previously, the magnitude of the Republican gains – whether or not they take either house – will be sufficient to end the government activism that prevailed over the past two years. Gridlock will prevail in 2011-12, which in general is a good thing for the markets.
With only three and a half months left until the election, could anything change this dismal outlook for the Democrats?
There are three wild cards:
The economy: If anything, the outlook has worsened. Everyone we talk with has lowered second half GDP projections, and it’s entirely possible that the fluky 9.5% unemployment ratefor June will inch higher, not lower, in the next couple of months. A dramatically higher stock market this fall could help the Democrats, but the economy is looking like an enormous albatross for the party.
Geopolitics: An “October surprise” has altered many elections, but usually in favor of the more hawkish Republicans. It’s difficult to see how a blow-up in the Mideast or anywhere else could be a major plus for the Democrats, who are increasingly dovish on issues such as Afghanistan.
Go negative: By default, this appears to be the best chance the Democrats have. From President Obama on down, the rhetoric will turn fiercely partisan, charging that the Republicans are in bed with big business, favor tax cuts for the rich, and agree with extremist policies that some Tea Party members favor, such as elimination of Social Security and Medicare. Most Republicans favor those programs — but if they don’t distance themselves from the Tea Party, they will be tarred with that brush.